All the greatest inventors, businessmen, scientists, investors, luminaries, innovators, industry-disrupting and impactful individuals have garnered their success from the two principles of being obsessed with something and remaining consistent with it. The formulaic approach of obsession and consistency given a long enough time frame will inevitably produce consequences, these consequences are what we interpret as success. In their prime, Warren Buffet read over 500 pages a day worth of 10-K statements, Thomas Edison famously worked and tinkered 18 hours a day, Bill Gates in the early days of Microsoft; pulled all-nighters to finish code. The pattern is evident and the formula is axiomatic. If you want to win, you have to be willing to do what others won’t. Average input equals average output. So go above and beyond, understand that the harder it is, the less people are willing to do it.

Granted, luckiness is a fair criticism of merit. Some people will never amount to anything and some will literally become famous overnight from one sensational clip or might win the lottery from a lucky ticket. The way we can cope with this inescapable truth is to always “stay cheerful in spite of your troubles” stated by Charlie Munger during a investment conference. Life is unfair and is capable of being utterly cruel but we must experience this suffering to derive any meaning from fulfillment. No matter your circumstance, keep on moving and understand that remaining bitter is plainly counter-intuitive regardless of your situation.

In the advent of modern science, we are understanding more about the health repercussions of overworking, drug abuse, and other means of pushing the limit. But, this creates a safeguard for mediocrity (in my opinion), as, people can shield insecurities about themselves onto others but making statements such as “that’s not healthy” or “you should enjoy life more”. To this, I ask; name a person of significance in all of human history who did not go through a period of imbalance in their lives. It never happened, they understood that in order to achieve, you have to be willing to sacrifice. Everyone has the same time in day but those who amount to something understand the vital importance of prioritizing what is actually important. Really analyze what you are doing with your hours in the last 7 days. Was most of your time used wisely, did you progress any closer to the goals that you promised yourself? Are you worse off or better off? Time is something most people seemingly give away without realizing before its too late.

How you do anything is how you do everything

Aristotle once said that "We are what we repeatedly do, excellence is not an act, but a habit'" which is to say that how you perform in one domain of life, no matter how trivial it may seem, translates to how to tackle more meaningful pursuits in life. For example, if you take a 4.0 GPA student at a prestigious university, chances are that student does everything with excellence. There is a strong probability that they have numerous healthy habits in addition to their effective studying. Such as daily reading, practicing an instrument, or perhaps they playing a sport regularly. They have order and discipline that drives their life. Ultimately, they do everything with excellence because they understand that how do you do anything is how you do everything.

Who can suffer the most will win.

"I don’t know how to teach it to you except that I hope suffering happens to you...", Jensen Huang, CEO of NVIDIA, when speaking with Stanford graduates. Arguably one of the most successful companies in the world currently is NVIDIA with a market cap of 3.3 trillion, NVIDIA seems to be the hardware backbone of the AI renaissance with industry leading GPU systems like the H100s, which have been restricted for selling in China. How remarkable is it that an idea discussed at a Denny’s restaurant was the inception of a multi-trillion dollar company. More about the AI race and the semiconductor industry, I highly recommend the extraordinary work from SemiAnalysis by Dylan Patel.

In Jordan Peterson’s 12 Rules For Life, there are many fantastic heuristics and mental models that help one turn their life around by adapting new ways of thinking such as holding once self accountable. One of my favorite heuristics is the community of selves. Imagine a yourself in a fourth dimensional plane; similar to the third dimension, where you can move physically and freely. Backwards, forward, and so forth. So, going back to the fourth dimension, you can move freely through time just like how you would move forward in 3D space. Furthermore, in the fourth dimensional plane, imagine a contingent timeline from birth, stretching towards the future where it obscures into darkness. Every single action you took has lead you to this very moment. Every choice, subjectively good or bad has put you in the position that you are in today. From this conclusion, you can predict the trajectory of your future based off the decisions you are making now. Are you exercising enough? Studying hard enough? Deliberately expanding your expertise? Executing on your startup idea? Whatever you infer, understand this. You are a custodian of your future self and your past selves are custodians of your present self. Do not disappoint your future self because if you do, not only will you resent yourself but you will never experience all that you could of been.

I’ll leave you with one my favorite quotes from Peterson’s book which I highly encourage you to read, “If you’re not suffering now, you will be in 5 years.”

Risk is everything.

Although, there is obvious and incredible risk to options. And the trouble begins for many traders when realizing the jarring complexities of the option markets. The lifeblood of options is liquidity, without liquidity, trades can not be executed successfully, especially in a market with millions of trades occurring at once. This is where market movers step in, an entity that pumps liquid into the markets by filling buy and sell orders in the magnitude of millions of dollars.

To put it succinctly, the three most important variables to consider for establishing an option strategy is; implied volatility, movement in the underlying asset, and time decay. As these three assemble the evaluation of an option contract (the price you are willing to pay for).

The moment you purchase an option, it begins its countdown until expiry on its maturity date. Declaring time decay which is measured with Theta. In addition, an option’s sensitivity to price change from movement in the underlying asset, is a parameter that can be measured with Delta. Lastly, how the option reacts to change in implied volatility in denoted with Vega.

There are of course more parameters that measures the risk an option, but for the sake of this article, I will encompass it down to these three Greeks.

Trading with the whales.

In biology, there are observational symbiotic relationships that larger animals hold with smaller ones. One of my favourite examples is in Sub-Saharan Africa, where the Nile Crocodiles and Plover Birds have a fascinating interaction that is opportunistic for both species. The bird scavenges leftover meat stuck on the Nile Croc’s teeth which acts as a dental cleaning and a meal for the Plover Bird. Proving mutually beneficial.

You often see this sentiment in the trading world, where retail traders try to emulate the trades of politicians or hedge funds. The biggest downside to this method is variable lag. Meaning that there is a substantial grace period (usually 30 days) where the politician or firm has to make trades available, rendering the trade log useless.

Sometimes this is done more implicitly where typically investors become bullish when the Fed begins to cut rates as it is indicative of booming markets. This is where the famous “don’t fight the Fed” phrase comes from as betting against what the Fed does typically won’t work well in your favour.

My intention is not to discourage new traders from entering the markets but rather warn of the risks and illustrate who you really are up against. Hedge funds composed on smart people working as a collective; PhD’s working in research, engineers working in risk management, strong math-quants in trading, and different desks focused on different instruments. One desk focused on options, one on gold, another on futures, and so forth. In some instances, one desk can be purely concentrated on a specific derivative for a precise company, such as exclusively trading call options for NVIDIA.

Quintessential profit potential.

With the help of AI, we are able to simulate a hypothetical option trade to demonstrate the profit potential. For simplicity’s sake, we are using low amounts, always keep in mind that hedge funds are trading on the magnitude of millions of dollars at their disposable. Now, let’s imagine the following.

Strike price - the price at which an option is purchased at.
Option premium - the price of what the buyer pays to the seller (the cost of an option contract).

Company A has a stock price of $100/share. The current strike price for a call option is $105. You are fairly optimistic on your trade and decide to purchase 1 contract. You decide to purchase the contract, the option premium is $2 per share or $200.

So, you now have 1 option contract which you purchased for $200 (ignoring broker commissions, taxes, and interest rates).

Your current position: $200 = (100 shares * $2 premium)

Now, say that the company releases profits for the first quarter and they smash investor expectations. The underlying asset (stock price) soars from $100 to $120. That means that you are now up $15 per share, but, you are not holding a stock, you are holding an option contract which gives you the right to 100 shares. Thus, your initial $200 investment is now worth $1500. Generating you a 650% return.

If the stock price where to drop below your strike price, it would render your contract useless at expiration.

Profit = (120-105)*100 = $1500 
Where, current price = $120, strike price = $105, call option = 100 shares

The bottom line.

The truth is that raw intellect is not enough to be profitable in the markets. Especially, as the financial markets become more mathematized since the 1990s with the pioneer, Jim Simons, introducing dense mathematical and statistical models applied to evaluating price, volatility, and other option technicalities. As time goes on, it will be progressively harder to outperform the market especially as language models continue to become ubiquitous in the markets. A machine can execute hundreds of thousands of trades faster than you can blink.

In the end, any curious individual wanting to enter the arena of option derivatives should understand who they are up against, the dynamics of the markets, be diligent and patient, and most importantly understand risk management.

January 2020, a new year reborn with unprecedented world events waiting to be unravelled. The last quarter of 2019 showed that the Federal Reserve sat on $18.6 trillion of total assets, a steady growth since the 2008 subprime mortgage crisis.

In the month of March of 2020, the infamous Covid-19 shutdown the world economy with the powerhouse of the United States being no exception. Commerce came to a halt, supply chains choked, and an economic impasse emerged with an no clear direction. The Fed immediately responded the same month with quantitative easing; purchasing of asset classes composed of US treasuries and mortgage-backed securities. This was one of the first policies that led to an influx of money creation by making money more available in the economy which caused interest rates to drop at near-zero levels.

At the end of 2020, the Fed added $3.2 trillion to its balance sheet.

• Jannuary 2020, federal fund rate = 1.55%

• March 28th, 2020, federal fund rate = 0.10%

  • From March 2020-2022, interest rates would be near zero

This was the first turning of the mechanism. When the Fed buys assets from the open market, it has go-to buyers composed of large banks and other financial institutions, which are entrusted by approval. Think of these approved buyers as intermediaries to the monetary policy. When the Fed initiates QE (quantitative easing), these intermediaries are vital in completing the process.

As these large banks collect money from the Fed by selling their bonds or mortgage-backed securities, the reserves of these large banks increase. As bank reserves rise, this becomes the driving force for money creation as banks now have more money to lend out. This effect cascades into the greater economy as money becomes more abundant. All that money is lent to home buyers, businesses, and everyday consumers which ultimately drives economic growth.

Bank reserves - cash holdings held by a bank; banks are required to hold a minimum amount of reserves at all times.

The acceleration factor.

Fractional reserve banking has been abandoned in the past after the pandemic. It was a system that facilitated borrowing among banks within their local economies. By allowing banks to lend out more money than actually kept in reserve. A law that had been the standard for the last 150 years.

Reserve ratio - the percentage of deposit that must be kept in cash as a reserve in case of customer withdrawal.

Hypothetically, if the reserve ratio was 5% and a customer had just deposited $100 into his local bank then that bank would be required to always have at least $5 on hand, no exceptions. The other $95 can be used for investment opportunities, lent to borrowers, or any other leveraging. If you envision this on a scale of millions of consumers and only a couple of banks, it can seem quite precarious.

• A 100% reserve ratio would imply if every customer demanded to take their money out at once, the bank would have it all available.

  • Such a ratio is unpractical but drives the point home.

Many economists critique fraction reserve banking as its biggest vulnerability being a bank run. If such an event were to happen, even a bank with a healthy capital ratio would go bust. As there is just not enough time to liquefy total assets as customers are withdrawing all their money almost instantaneously. This is assuming that the bank is extremely conservative with its leveraging.

Capital ratio - the percentage of a bank's capital to its risk-weighted assets.

Nonetheless, on March 15th, 2020, the Fed announced a reserve ratio of 0%. Which now meant that banks were no longer required to hold any money in their reserves and were able to lend out all their cash. The Fed’s intention was to bolster the economy as people were not spending and saving exuberantly, made evident by the bank deposits.

Speaking of which, bank deposits spiked as Americans were not able to spend in a locked-down economy. This is where the vernacular expression “printed money” originates from. Although, it is utterly erroneous to believe that the Fed as a single entity physically prints all of the money into the economy. A combination of QE and 0% reserve ratio equates into a tremendous injection of money into the economy.

Banks were now able to leverage and loan out entire reserves, this lead to an over 35% increase in aggregate bank deposit growth, the fastest in recent history.

Bank deposits - money kept or held in bank accounts for saving or interest.

• March 11th, 2020: bank deposits = $13.479 trillion

• December 30th, 2020: bank deposits = $16.06 trillion

  • Fun fact, more money was bottled up in the US economy than the size of China’s GDP ($14.7 trillion in 2020)

This hawkish policy poured monetary gasoline on the inflationary fire. As regional banks were now able to lend out at record levels. But once again, during a time where commerce virtually stopped dead in it’s tracks.

In macroeconomics, the leading theory for money creation states that banks create new money when creating loans. If bank A loans out deposits from customers to bank B, bank B can now loan out their borrowed money to bank C, and so forth. A perpetual cycle which can be calculated using the money multiplier effect.

• Most money is created by commercial & regional banks, not the Federal Reserve

Ultimately, this phenomenon expands the bank deposits rapidly.

This is all occurring during a time when Americans are worried, demand is climbing (due to newly created money), and supply is stagnating (consumer spending down 2.7% from 2019-2020).

Monetarism says look at the money supply.

Despite what the politicians, radio, or corporate news is telling you with various theories to understand why inflation spiked from the supply chain to the oil reserves being drained. When in actuality, the strongest case can be accredited to the Monetarist school of thought. The philosophical premise of Monetarism would argue that economic growth can be optimized through the amalgamation of the money supply. In other words, money is the lifeblood of an economy; it is to say that too much or too little can cause serious damage.

When primarily studying the M1 money supply, in December 30th, 2019, the M1 was at a balance of $4.2 trillion. In a lapse of single year, the M1 reached an immense balance of nearly $18 trillion in December 28th, 2020. A meteoric 329% increase in the money supply.

M1 - the count of all notes and coins in circulation (an estimate of aggregate cash, chequing, and saving account deposits).

• The M1 money supply peaked to exactly $17.989 trillion for the year 2020

  • Total peak reached to $21 trillion in April 2022

    • That’s more than the total amount of gold above ground = $12 trillion

    • And the entire market cap of the cryptocurrency markets = $2.3 trillion (April 1st, 2022)

    • Combined together…

The point of no return.

Now, such an unprecedented and drastic increase in the money supply subsequently increases demand as buying power rises, combined with a quarantined economy halts virtually all markets due to public health mandates. This causes the supply of nearly all goods to stagnate for a whole host of reasons; such as mass layoffs across the country, businesses filing for bankruptcy, overall energy consumption decline, general fear and anxiety, and supply chain complications.

In the end, what happens if demand rises and supply falls? Inflation. Leading to the inflation peak of 9.1% in June 2022.

CPI (consumer price index) - the average change in the prices paid by consumers for a market basket of consumer goods and services.

• CPI rate for January 2020 = 2.5%

• CPI rate for April 2022 = 9.1%

• Current CPI rate for July 2024 = 2.9%

There is more nuanced discussions to be had with other factors that led to the inflationary period of 2022 such as the Russia-Ukraine invasion, CARES Act, and a overheated labour market. For the sake of your time, it will be left out for another time.

Overreaction by the FED?

I’ll leave this one for you as the reader to decide. Regardless of politics or diverging views on monetary policy. One thing is for certain, the sentiment of most Americans is frustration from lack of affordability in their every day lives. Do you believe the central banks were too aggressive in pumping money into their respective economies?

Subscribe now