Moontower #147
Gamma For 5 Year Olds
Friends,
I exhausted my writing energy in this week’s Money Angle, so today you get a grab bag.
🏫Schoolhouse.world (check it out)
This is the latest initiative by Sal Khan (definitely a hero). It’s a peer-to-peer live tutoring service focused on HS math and test prep. If we know anything about KhanAcademy then we can expect this is just the beginning.
Schoolhouse.world is a platform for free, peer-to-peer tutoring–where anyone, anywhere can receive live help, build their skills, and pay it forward by becoming a tutor themselves.
I happened to be browsing the list of donors to KhanAcademy and was heartened to see how bipartisan it was. Their mission transcends our differences.
✍Elon’s Giant Package (12 min read)
by @ranjanxroy
Some background before reading Ranjan’s post.
Earlier this week Matt Levine wrote:
Twitter is a strange company; it has enormous influence on politics and culture but is not great at making money. It has a lot of power as a venue of public discussion, and there is a lot of debate among Twitter’s employees and users, and among politicians and regulators, about how it should use that power. Elon Musk certainly cares about this stuff, and has explicitly said that he wants to buy Twitter not for economic reasons but for “free speech.”
The narrative is “free speech”, but I’m personally a bit skeptical because my impulse is buying Twitter seems more coherent as Elon:
1) secures distribution. It’s like marketing capex that also happens to have vanity value.
And it makes sense for things that have vanity value to be uneconomic. Indulge me:
BWK Capital @BwkCapital
Elon Musk, who has never run a social media company, is taking on $25.5 Bn of debt to buy a social media company that is forecasted to generate $1.4 Billion of EBITDA and ~$400 Million of FCF this year. At a 5.5% cost of debt, 100% of EBITDA would go to pay interest. $TWTR $TSLA https://t.co/CNH216jdCI2) wants cover to diversify from TSLA shares. If Twitter is run like a “clown car that crashed into a goldmine” then presumably it has potential upside independent of vanity.
Ranjan’s mini-grand theory on what Elon’s up to with Twitter was resonant with my prior. After reading that, consider something I’ve mentioned before. Portfolio theory asserts that things which don’t make sense in isolation can be brilliant when paired with the right strategy or synergistic buyer. Especially today. It’s spelled out further in:
✍Portfolio Theory And The Invisible Option On Hobbies (7 min read)
Twitter is more useful to Elon than anyone else on Earth. Whether it’s useful enough to him to justify the price is another matter, but it’s not shocking that he’d be the most justifiable high bid for it.
Let’s end with some housing talk. I think comparisons to 2007 are off base. Lending standards are tighter and people are flush with cash right now. It’s not to say I’m bullish exactly, but I think the downside in nominal terms is fairly contained. I suspect RE will be dead money in real terms for a while but then again, everything might be. It could be the tallest midget for the foreseeable future. I’m also the ass who sold his house in late 2020 so maybe discount everything I just said by 200%.
Read Calculated Risk instead:
✍Don't Compare the Current Housing Boom to the Bubble and Bust (4 min read)
by Bill McBride
Money Angle
In the past few years, I’ve written several posts about option greeks.
If you are familiar with them, you know my goal is to explain things like you are 5 years old (well more like 12…my kids don’t know how an option works yet). I struggle to read technical finance papers because I’m, like a human being and stuff. I assume others feel that way about option greeks.
My latest post occured to me as I was falling asleep Tuesday night, so I spent Wednesday in a fever of writing that reminded me why I don’t write technical posts all the time. Even a concept I feel very comfortable with took about 10 hours to write about.
Check it out:
✍Moontower On Gamma (15 min read)
Gamma is a concept that maps perfectly to acceleration in physics which is an intuitive and familiar concept we encounter in daily life. We can use that analogy to see why p/l is the same idea as “distance traveled”. From there, it’s delightful to see why option profits have a squared term.
If you want the krisnotes with less of the math:
Just a reminder, I maintain the Moontower Volatility Wiki with the help of the online nerd community. It’s a collection of resources for quant finance with a focus on options. I curate what goes into it, but it’s a community effort ultimately:
Last Call
I’ve been following and chatting with Adam Butler and his teammates Rodrigo Gordillo and Mike Philbrick from ReSolve Asset Management for a while. They are a super-smart, thoughtful group of guys that I learn from. They asked me to come on their show which could have been very intimidating (these guys talk to people with way more things figured out than I ever will), but they made me feel comfortable enough to just riff.
I sound like a meatball. You can take the kid outta Jersey but, well let’s just say I prefer to hide behind print for a reason. It’s mostly stories with some risk managment ideas sprinkled in.
ReSolve Riffs on Exploring Life Under The (Option) Surface (YouTube)
If you prefer audio only (you don’t have to watch me gesture like a crackhead) here’s the Spotify link.
Great interview! You are a story-telling X-Man.