Category: Finance


Convexity in DCFs

In this post, we revisit classical DCFs through the lens of convexity. This leads to the counterintuitive finding that increased uncertainty about an asset’s fundamentals can sometimes be a good thing!

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Probability matching and Kelly betting

In this post, we discuss a cognitive bias called probability matching, explaining how it is rational from a population perspective. We then make an analogy to the Kelly criterion, a betting strategy that finds widespread use in both gambling and finance.

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Option-implied probability distributions, part 2

In Part 1 of this series, we demonstrated that the prices of option butterfly spreads imply a probability distribution of prices for the underlying asset. In this post, we will first examine the limiting case of butterfly spreads. Then, we will tackle the industry-standard approach for constructing PDFs from option prices: interpolating in volatility space to generate a volatility surface, converting this into a continuous set of option prices, then applying the Breeden-Litzenberger formula to find the PDF.

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Option-implied probability distributions, part 1

The goal of this two-part series is to understand what option prices can tell us about the implied probability distribution of future asset prices. Part 1 lays the groundwork and examines an intuitive approach using butterfly spreads.

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Equity Investing Checklist

This page represents a work-in-progress checklist for equity investing. It is continuously being refined based on my reading, as well as my actual experience in researching and investing. The hope is that this provides transparency and accountability (for myself), to better understand my cognitive biases and weak spots.

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The Big Shorts: what is the smart money betting against?

Hedge funds in the UK are legally obligated to disclose to the Financial Conduct Authority (FCA) whenever their net short position in a particular listed company reaches 0.5% of the issued equity capital. In this post, I investigate a publicly available dataset containing information about these large institutional short positions in UK equities and attempt to understand the value that this data contains.

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A Tanker Trade

April 2020 has been a volatile month for oil. Last week, the May WTI contract traded at a low of minus \$40 a barrel. In a desperate search for storage space, people have been chartering oil tankers to use as floating storage units, leading to a price surge in shares of tanker companies like Nordic American Tanker (46%), Teekay (30%), and Scorpio Tankers (59%). In this post, we aim to build a framework for forecasting the revenue of DHT Holdings (NYSE:DHT), a tanker company.

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Understanding the market's expectations of COVID-19

One of the reasons why I find markets fascinating is that they are capable of integrating huge amounts of information, misinformation, hope, fear and uncertainty into a single number – the price of an asset. In this post, we work backwards, quantitatively examining what the current price of an asset can tell us about its future prospects.

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An asymmetric bet on interest rates

In this post, we discuss how asymmetric bets can be evaluated with the expected value. Following this, I argue that the market was overestimating the probability of a rate cut in July 2019 and examine how the inherent asymmetry of the situation can set the stage for a profitable macro bet.

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