More Grit, Less Drip

Doing the work should be its own reward and Kris + Mark show that

I know it is a bit of a humble brag, but I have this thing where I end up tackling 4 books at once. There is a physical book that I read, an e-book, an audiobook, and then an audiobook that I listen to with my lady (technically we also read a physical book together but that ends up being very infrequently). Right now the e-book is Mastery by Robert Greene and the audiobook i

s The Dao of Capital by Mark Spitznagel. I bring this up because I just watched two of my favorites, Mark Phillips and Kris Abdelmessih go deep on analyzing a TSLA covered call strategy. I’d like to bring all three together in this post to illustrate how to learn about trading.

First, if you do nothing else, go watch the video. These are two professionals and the dialogue between them is as important as the research itself. In fact, that is lesson #1:

1. Working with someone else keeps you more intellectually honest than you would otherwise be. If you know that you are presenting your work to someone, anyone, you will automatically tighten things just because you will want to communicate clearly and not look like an ass. Or, as Shane Parrish puts it in today’s Brain Food: “Writing is the process by which you realize that you do not understand what you are talking about.” Yes, they are the same thing: writing (like this blog!) is the way that you speak to yourself as if you were a different person.

Why do they do this and what are they getting out of it? Look, at one point, Mark talks about skew as an indicator of future returns for the strategy. He found that it happened to help avoid bad losses having the short call on. Great. His response: “I could see that. I could also convince myself of the opposite. That is why you need to look at the data.” 100%.

2. Doing the work is part of your 10,000 hours. Yes, I’m aware that people want to break this idea claiming that it is not necessarily 10K hours — of course it is not. You don’t click from being an amateur to a professional on the roll from 9,999 to 10K hours; it is just that you need to build a body of work to create your own mental database. And while you may not get “continuing education” credits like in some fields, I’d argue that we all need to be doing this sort of thing as an ongoing expansion of our capabilities (and I am most definitely talking to myself here).

Why is this different than doing technical analysis and/or doing backtests out the wazoo until you p-hack a bad solution? They are not optimizing. They are doing a research project that forces them to ask questions and iterate through. In fact, this roughly the education process that Darrin Johnson took to build himself into the trader that he is today and the inspirational figure that he is, too. Please check out his appearance on Corey Hoffstein’s podcast (the amazingly named Flirting with Models).

3. General James Mattis has told us “If you haven’t read hundreds of books, you are functionally illiterate, and you will be incompetent, because your personal experiences alone aren’t broad enough to sustain you.” The same goes for the market where there are not (exactly) books telling you what may work or not. In fact, if you want the good stuff, the stuff that works that is not blandly generic (yet still high quality), then you have to roll up your sleeves and go to work. The key part is that you are not doing this research to to lead to an answer. You are doing it to lead toward the tools and the expertise that will lead to a winning trading strategy. This is what Spitznagel refers to as the roundabout strategy in the Dao of Capital. You don’t do this for the immediate reward of a working and foolproof money machine. You do it so that you know the questions to ask and what factors and what risks may lie in wait for you. Then you take that information and strive to either go deeper again or work on a the strategy.

One of the key benefits of the study that they do is that they break it down as both a directional (the covered call strategy) AND as a sell volatility strategy. This forces us to think about the nature of volatility, option pricing, asset movement, and the pnl attribution. To be honest, there were not a lot of conclusions given — the main one was “why are you investing in a single name that you think is going to 10X and then sell a call that cuts off the right tail of the distribution that you bought in for in the first place?” Mostly this was a lot of investigations, data display, and tours down a few rabbit holes. Note that both say how much fun it was to work on and that they were surprised by some of the results. This is what Robert Greene would say is the 2 of them tapping into their childlike - open minded brain as a Master for true creativity.

4. If you find this sort of thing interesting, that is a good indication that you are cut out for this. On the other hand, if you find that all you want is the “answer” then maybe this is not for you.

Personally, I was a bit surprised by the results and I’d like to pursue it further. One of the ways that I think about options is buying future liquidity now. Options pricing is based on an estimate of replication. Replication is buying and selling the underlying to end at an expected value of the option price. So it seems to be that if I sell a covered call that I’m selling that replication. Since I, as an individual, don’t have great trading rates or an amazingly efficient dynamic hedging strategy, selling that to a sophisticated options market maker ought to be accretive. Yet this research suggests otherwise.

I have all sorts of specific questions, too:

• Would simply buying 25d OTM calls have worked?

• What about the puts? Or the strangles?

• Is this specific to TSLA? Or some set of criteria that defines TSLA (market capitalization, story stock, high valuation, ???)

There is quite a bit in the video. There is more that I would like to talk about. I’m sure if I listened again, I’d get more out of it. I feel like this sort of thing is more valuable than doing something more statistical. The actions of doing this for one stock are, of course, living in the land of small numbers. But the crafting of this and the looking at the data and the asking of questions sets the stage for doing something that is more statistical. By statistical, I mean coming up with a set of criteria. But to even get to this point, you need a certain amount of experience and I think, particularly while reading Mastery, it is worthwhile to have a mentor — or a co-worker as these two did.

Apologies for being so irregular lately. My multi-faceted life is giving me plenty. Related: Happy Father’s Day!