Market Jiujitsu

Breaking down option markets by first principles

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I’ve been trading, coding, researching, and analyzing the markets for nearly all of my adult life. Unfortunately for me, that turns out to be a rather long time. The good news for everyone else is that I’ve picked up some insights along the way. I’ve been thinking about writing about these topics for some time, so this is a bit of long unrealized goal of mine. This is the first entry for a blog whose goal it is to improve your trading and how you look at the markets. And, more likely than not, my trading as well — both from teaching and feedback from readers.

The title of this blog is “Market Jiujitsu” because my primary goal is to investigate and discuss how we can use the prices the market gives us — typically but not always derivatives markets — in way that suits our own situation or purpose. This is akin to the general idea of Jiuitsu in using our opponent’s weight and/or momentum to win. In many respects, the blog will show various demonstrations of “price is what you pay, value is what you get” (Warren Buffet).

On the surface, this is about some practical ways to get a few extra percentage points of return into your portfolio in a way available to individual investors. On a second level it is about trying to show how professionals (but not all!) look at trading. Kris Abdelmessih describes one way extremely well: “measurement, not a prediction”. Setting up a routine is another.

On a third level it is meant to inspire me and you to be able to look at a situation and not fall into seeing what the market wants you to see. The market can be a bit of a magician putting on an illusion and hiding what is really going on. Instead, if we can look past the surface, we may be able to see what is actually on offer specifically for you or for me in the wide availability of assets & prices. Just because Black-Scholes says that fair value for an option is X may still mean it is very tradable for us given our specific circumstance or market view.

The large scale market makers of the world have real advantages over most of the rest of us. This includes technology, capital, market access, and the very best fee structures. Even though we have far lesser advantages, the competitive nature of the markets can offer us partial access to the advantages of those large scale market makers.

We don’t need to go to a bank to earn interest. We don’t need to use options in order to dynamically replicate a position. We don’t need to trade calls when we want a positive exposure. And we don’t need to buy stock in order to gain long exposure to a company. We need to start asking ourselves: what is our alternative? what are my costs? How can I use order flow and efficient markets as my own personal jiujitsu?

Jiujitsu is often considered the art of using one’s competitor’s weight, momentum, and movement against them. That’s what we are going to do. The model and the standardized usage of options has become so fused to the prices themselves, that it becomes difficult to extract value out of the market that is not in line with these mental presets. The goal here is to give you some examples to escape and thereby take advantage of this very efficient market, and as a reach goal to help look at other parts of the world and see how best to unfuse bundled perceptions from reality and take “personal” advantage of the options market.

The topics that I aim to cover may be as specific as using the option market for taking advantage of the cost of hard to borrow stocks, lending or borrowing money via boxes, or mindset of a trader or some topics that I just find interesting and think you may, too.