"turds floating to the surface before the flush"

Moontower #278

Aug 03, 2025

Friends,

Haven’t read a good listicle in a while. Cate Hall delivers.

50 things I know (6 min read)

These were my favorite out of the 50. I bolded the sections I agree with but need reminding of. The possibility of stumbling on such reminders is the payoff for reading such lists as opposed to hearing something that changes your mind:

10. There is, annoyingly, really something to the idea that our childhoods have a massive effect on our later lives, and it’s possible to be totally convinced that you’ve gotten over your past while still laboring under all sorts of mental distortions as a result. At the same time, the point of engaging with all that stuff has to be to become more functional, not to develop an identity as a victim, or to constantly be peeling your skin off.

19. It’s possible for someone to have a motivational system very different from your own and still be a force for good in the world. I’m turned off when people are motivated primarily by prestige, but many great works have been produced at the altar of social status.

20. People don’t really get to choose who they are; many of the things we call “merit” are actually just another form of luck.

27. People are their own punishment, which means revenge is rarely worth it.

30. The most important thing to hire for is deeply giving a fuck, and no amount of money will get someone who doesn’t care to care. This means you should pay people enough that it’s easy for them to say yes, but not enough that it’s hard for them to say no.

35. You will always feel bad about being mean to people after the fact, even if they deserved it. [Kris: this is one I’m pretty good about remembering, but social media will test you!]

36. “You are ruined by your gifts” — the traits that make you exceptional are the very same traits that show up in your neuroses and limitations. Learning to love the upsides, if undertaken with clarity and gentleness, also creates more space to address the downsides. This is what makes the Enneagram tremendously potent.

37. You can’t save the world if you can’t save yourself.

39. The freedom to be fully honest with other people is hard to overrate or even describe. It is always available to you.

48. People who are eager to insist that every action is “selfish” because it reflects some kind of preference, or who claim that altruism is just virtue signaling, are telling on themselves — they might be very clever, but they should never be trusted with real power.

49. You should pay special attention to the thoughts that gnaw at you despite them being against your self-interest to think.

I’ve never written one of these listicles, but one day, when I’m feeling indulgent I might try to distill down my affirmations.

Money Angle

One of the first lessons I learned in trading is how the tip of the information spear is the futures market. ES moves before the SPX cash index (ie the ordinary shares). That’s because the futures market is both liquid and levered (margin requirements are 5-10% of notional value).

It was an early lesson because I was a clerk in the SPY ETF pit on the AMEX.

[“Clerk” is a ratty title for an assistant trader but as a Randall-maxi from NJ it suited me just fine.]

SPY ETF arbitrage was similar to index arbitrage. The futures have a basis or “cost of carry” differential vs owning the underlying basket of 500 stocks in their correct proportions. The index plus the basis comprises the index “fair value”. When bullish news leaks into the market the futures rocket above this value drawing the arbs to short the futures and buy the shares. The spread is called the “premium” (or “discount” if the futures are “trading under”). It’s a number you see during CNBC pre-market which gives an indication of where stocks will open.

The “futures leading the cash” is an instance of a wider principle that derivatives often lead. That again follows from the fact that they are levered and usually more liquid. We recently learned this is so true in India that options are practically the primary market! Even here in the US, you can argue that the HYG etf is where price discovery in high yield credit happens. ETFs like HYG and SPY are derivatives. Their fair value is derived from an underlying basket, but their price moves faster — so by looking at the ETF the logic is inverted — “if the ETF is trading for X then the basket is implied at Y”.

🔗Another example of derivatives become the underlying

Options are insiders’ weapon of choice because of their leverage. It’s also why we give a lot of respect to single stock option orders — they can be information-rich. It’s also why the SEC pays (paid?) attention to option markets so closely. They know cheaters like ATM or OTM options.

I was thinking about this idea generally as “leverage + liquidity” lead.

So what lags?

Staying alliterative:

“Illiquid and indirect”

Illiquid: ordinary shares, cash bonds, real estate, PE (famously so as their selling point to some is “volatility laundering” since they aren’t MTM and can mask their gyrations)

Indirect: Investing in power generation as an oblique AI play, buying wheat vol instead of oil when Russia invades Ukraine, buying potatoes in the wake of the Chernobyl disaster.

2 of the more clever people I follow in trading, Scott and Lily, have hinted that the laggards “catching up” is something to watch as a contrary indicator.

Scott calls it the “turds floating to the surface before the flush”

the phenomenon where money keeps chasing assets further out on the risk curve which becomes a cause of momentum crashes

He cites the 2012 paper Momentum Has Its Moments.

From the abstract:

Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable.

Lily (I can’t find the tweets) understands the psychology of turd buyers. I’m paraphrasing but it’s basically fomo investors who missed a large move and are now scrambling for the knockoff or discount version.

(Just me speculating but I’m guessing a lot of people overtrained on value thinking are highly prone to this mistake — it doesn’t strike me as the kind of error momentum-based investors make. They have their own issues.)

When the turds float up, does the risk/reward on near or medium time scales start to rollover? Seems like an interesting area of research. I would expect the turd buyers to be especially weak hands since their purchases were not rooted in conviction but fear (of missing out).

If turd rallies are coincident with falling IVs (typical stock up, vol down) then that presents as an opportunity for cheap bets on reversion that might get sloppy on the unwind. Just a thought.

If anyone launches the Mr. Hankey Flagship Fund, feel free to advertise in moontower.

Money Angle For Masochists

🎙️How to Profit Using Volatility in Options Trading (The Outlier Podcast)

Erik and I talked trading for about 90 minutes. I answered question on these topics, amongst others:

1. The Leap to Independence
2. Core Trading Principles from SIG
3. The "Measurement, Not Prediction" Philosophy
4. Forging Intuition Through Experience
5. A Dual Approach to Risk Management
6. Navigating Volatility as a Retail Trader
7. Decoding the Options Market
8. A Myth About Options Trading That Should Be Dispelled

🧮The OpenQuant Game Room
Fast-paced mental math and brain games to sharpen your instincts. Hosted by OpenQuant, a community organized around landing and prepping for quant job interviews.

I added this to the Career Advice repo on the moontower quant site.

Basic trader math in the wild

DM asked me if the SPY 10DTE straddle at $8 is cheap relative to a close-to-close vol of 6%.

"Cheap" or not is for you to decide but this is the math they're looking for:

straddle as % = 8/600 = 1.33%
1.33% * sqrt(365/10) = 8.06% (annualized straddle)
8.06% * 1.25 = 10.07% (annualized IV)

The 1.25 thing explained in here:

😈The MAD straddle

Also encompassed in:

🧠Math Shortcuts Traders Know by Heart

From My Actual Life

We move to our new house Saturday so we are buried in boxes, errands and that feeling where you know you aren’t going to be settled for months. One task that’s about 50% fun and 50% first-world problem is furniture shopping and decor.

Our architect for the ADU we’re building is also doing design work for 3 of the rooms in the main house. I’ll share stuff that might be interesting to others as it comes along.

2 things to mention this week.

1) We are getting solar as the 30% tax credit ends this year. Part of that project is installing an array of batteries that we’ll be cycling to minimize grid usage and, well, it’s the East Bay — fire season is planned electric outage season. Reserve power instead of a generator is a nice perk.

2) Yinh discovered that ChatGPT is pretty amazing at helping you visualize a room.

This is the dining room as it was staged.

Dining Room featured at 10 Candlelight Ln, Lafayette, CA, 94549

She prompted it with several different looks organized around the chairs we like. It did a good job helping us visualize even of the room isn’t perfectly reproduced.

I asked it for an Ozzy Osbourne vibe and something more bat-friendly:

And getting a bit weird by prompting “70s”:

I’ve also been chatting with it about eras and aesthetics that I like (retro-futuristic, space age optimism days, mid-century Palm Springs, palmetto, atomic ranches, Americana, muscle cars, 80s LA neon vaporwave, 70s Boogie Nights or Once Upon A Time in Hollywood) just throwing everything against the wall and it’s pointing me to artists and photographers. I told it I like the look of Desert 5 Spot in LA and it pointed me to furniture stores that would suit the vibe. I look forward to this exercise before I go to bed every night — it feels like what the LLM is well suited for. Like free associating on squishy concepts where you lack the vocabulary but “know it when you see it”.

I’ve got Notion pages filling up with ideas and resources as we manage this stuff. This is a list of furniture stores where I’ll browse for stuff depending on the style.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

Vol drag is misunderstood…until now
TAFO: Trade and find out
A reminder that the webinar recordings are up for paid subs

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