macrocephalopod on Twitter: "It looks like magic because the example uses a very contrived distribution of returns, but it’s the exact same principle behind why buying a stock index has positive returns even though buying a single stock will likely make you go broke.… https://t.co/KonahnuEu7"

@macrocephalopod

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Corey Hoffstein ‏Verified account @choffstein 8 Feb 2021

Corey Hoffstein Retweeted Agustin Lebron

I “discovered” this idea of variance clock time back when I was 20 and found that returns/volatility ≈ normally distributed. Trend following applied on a variance clock, not a wall clock, was the first model I really built. I wrote a bit more here: https://blog.thinknewfound.com/2019/03/time-dilation/ …https://twitter.com/AgustinLebron3/status/1358793444412428288 …

Corey Hoffstein added,

Agustin Lebron @AgustinLebron3

3/ Let’s start by talking about time. Time is surprisingly hard to think about. But why do we care? Well, as we said in Options 101, we want to convert our options prices into vols because of #reasons. And to do so, you need to know t_exp.

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8 replies 9 retweets 105 likes

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Agustin Lebron‏ @AgustinLebron3 8 Feb 2021

Replying to @choffstein

returns / vol = N(mu,sigma) is one of the most important insights one can have about trading.

1 reply 4 retweets 31 likes

Kris‏ @KrisAbdelmessih 8 Feb 2021

Replying to @AgustinLebron3 @choffstein

literally one of the first column i put in a dashboard next to "return"

1 reply 0 retweets 3 likes

macrocephalopod‏ @macrocephalopod 8 Feb 2021

Replying to @KrisAbdelmessih @AgustinLebron3 @choffstein

I would say returns/vol ~ t(mu, sigma, v) but otherwise more or less agree!

1 reply 1 retweet 9 likes

Agustin Lebron‏ @AgustinLebron3 8 Feb 2021

Replying to @macrocephalopod @KrisAbdelmessih @choffstein

1 reply 0 retweets 0 likes

Freak0naut‏ @FREAK0NAUT 8 Feb 2021

Replying to @AgustinLebron3 @macrocephalopod and

https://twitter.com/FREAK0NAUT/status/1337904932536586241 …pic.twitter.com/BjQRx1mmpl

1 reply 0 retweets 2 likes

macrocephalopod‏ @macrocephalopod 8 Feb 2021

Replying to @FREAK0NAUT @AgustinLebron3 and

I'm not sure what you're getting at. The pages you posted are describing volatility drag (in particular how you can overcome it with diversification and proper bet sizing). What's the relevance?

1 reply 0 retweets 0 likes

Freak0naut‏ @FREAK0NAUT 8 Feb 2021

Replying to @macrocephalopod @AgustinLebron3 and

that's not what those are describing. Shannon was specifically trying to find the most volatile stock so that he could rebalance the portfolio more frequency. and in that example the returns are stationary the whole portfolio is capturing vol, there's nothing to drag

1 reply 0 retweets 0 likes

macrocephalopod‏ @macrocephalopod 8 Feb 2021

Replying to @FREAK0NAUT @AgustinLebron3 and

Of course there is. The stock has expected arithmetic return of 75% and expected geometric return of 0. Vol drag is the difference. By using less leverage and rebalancing you get closer to the arithmetic return (because you halve the vol drag)

1 reply 0 retweets 2 likes

macrocephalopod‏ @macrocephalopod 8 Feb 2021

Replying to @macrocephalopod @FREAK0NAUT and

It looks like magic because the example uses a very contrived distribution of returns, but it’s the exact same principle behind why buying a stock index has positive returns even though buying a single stock will likely make you go broke.

12:12 PM - 8 Feb 2021

1 Like

2 replies 0 retweets 1 like

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1. Freak0naut‏ @FREAK0NAUT 8 Feb 2021
  Replying to @macrocephalopod @AgustinLebron3 and
  
  see with power of options, you can be both long and short at the same time... @goodalexander just dynamically hedges... like some kind of degen tho...
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