I like the analogy of put-call parity to the difference between "congruent" and "equal" in geometry. "equal" means they are "the same". Puts vs. covered calls are not the same (or equal) but they are congruent, for sure. The analogy is further to how "two legs of a triangle bring you to the same place as the other leg", "two legs of a trade lead to the synthetic, and how to get back to zero risk? the other leg."
This sentence really packs a punch: “The gap between win rate and expectancy is where the dragons of marketing and charlatans live.”
Whenever I get pitched high win rate strategies I always immediately look for how I’m getting short vol or some tail. It holds true across all sorts of businesses, there is no free lunch.
any high win rate strategy is selling some sort of option which is how you get the high win rate, the proverbial pennies in front of a steamroller. if you extend this line of thinking to fixed income you reveal a whole different way to think about interest rates. Corporate bonds will outperform treasuries until defaults hit. When long-term sovereigns offer a yield pickup you are selling an option on cash, when the curve is inverted you are buying an option on cash. Yield/income of any sort is a short option position. this concept is implicit in the time value of money. If I lend you cash I have sold you the option for what to do with that cash and you pay me for that option in the form of the interest rate I charge.
I like the analogy of put-call parity to the difference between "congruent" and "equal" in geometry. "equal" means they are "the same". Puts vs. covered calls are not the same (or equal) but they are congruent, for sure. The analogy is further to how "two legs of a triangle bring you to the same place as the other leg", "two legs of a trade lead to the synthetic, and how to get back to zero risk? the other leg."
Poetry!
This sentence really packs a punch: “The gap between win rate and expectancy is where the dragons of marketing and charlatans live.”
Whenever I get pitched high win rate strategies I always immediately look for how I’m getting short vol or some tail. It holds true across all sorts of businesses, there is no free lunch.
any high win rate strategy is selling some sort of option which is how you get the high win rate, the proverbial pennies in front of a steamroller. if you extend this line of thinking to fixed income you reveal a whole different way to think about interest rates. Corporate bonds will outperform treasuries until defaults hit. When long-term sovereigns offer a yield pickup you are selling an option on cash, when the curve is inverted you are buying an option on cash. Yield/income of any sort is a short option position. this concept is implicit in the time value of money. If I lend you cash I have sold you the option for what to do with that cash and you pay me for that option in the form of the interest rate I charge.
Presenting the counterfactual and visualizing the excess returns here really drives the point home!
I forget how I discover you. I start d reading your content carefully recently and your writing is so incredibly good and useful Kris. Good job!
👊