In this episode, Kris Abdelmessih, Co-Founder of Moontower AI, and Adam Butler, CEO of ReSolve Asset Management, join the ReSolve team to discuss the challenges and rewards of parenting, the role of education, and the intricacies of the options market. They delve into a variety of topics, including:

Topics Discussed

• Kris and Adam's differing views on the importance of academic excellence versus exploration in children's education

• The role of AI tools in helping kids complete their homework faster and encouraging them to be resourceful

• The importance of resilience, self-directed curiosity, and critical thinking in children's development

• The concept of 'shape of returns' in the options market and how it differs from hard outcomes in options contracts

• The idea of using ETFs as a toolset to execute investment ideas based on volatility

• The progression of Moontower AI and how it helps investors understand and navigate the options market

This episode is a must-listen for anyone interested in the intersection of parenting, education, and finance. It provides valuable insights into the role of exploration in children's development, the potential of AI tools in education, and the complexities of the options market.

So you're probably never going to forget your phone number ever again, right? But you learn some random fact and you're going to forget it in three days if you don't use it. So, the rate at which we forget things follows these, follows like a function, it's a forgetting curve. So spaced repetition is the idea that if I can give you a dose of the thing that you want to know right before you forget it, that's like the optimal time to give you a dose.

[00:01:08] Kris Abdelmessih: Yeah, absolutely. So first of all, thanks for having me on. It's always a lot of fun for me to talk to you guys. So over the last, so the big, well, first of all, for people who don't know me already, I've been, I was a professional options trader for 21 years, started at SIG, spent eight years there as a market maker, focused on equity options and then commodity options, and then had my own market-making group.

I had a backer in Chicago, which is a thing floor traders have to do, and so I ran that business for about three and a half years, and built that up to a small group. We're about five of us. And then, after that, I went to Parallax in San Francisco, which is a relative value vol fund. And I spent close to a decade there, built out the commodity vol trading business there.

There was really like the transition kind of way of seeing the world between when I was a floor trader, which is a much more market-maker oriented kind of role to an upstairs relative value vol trader, which is a much more of a, what you'd call a position trader. The genesis of that transition was really the kinds of analytics that we’re creating Moontower AI.

Option Value and Academic Excellence

[00:03:48] Kris Abdelmessih: Yeah, I mean, the main thing for me with my, with kids is I mostly just want them to feel, I want them to feel like they, it's a very heavily used term, but like their own agent, right? You want them to sort of author their own life in a way, and you want them to have a lot of choices. I think parents are all, I think a lot of parents are very aware of this idea.

That's why you put your kids in like, hey, try this sport out and, you know, try, let's go try this math thing, or maybe try some coding, or maybe you want to just get into whatever hobby it is and discover, and you're just really trying to figure out what they're into, and then figuring out.

You're going to lean into that a little bit further as they get older, because I think that, I have the belief that depth is intrinsically rewarding. It's very, to go deep into things is empowering, it's rewarding, and I kind of orient everything towards, really that idea of flow.

Like, how do you just do the thing you want to be doing? And of course, you know, at some point you're going to need to make a living, but I think that you'll tend to go further if you're doing something that you really love, and that thing is also aligned with your talents. And so what is, you spend the first 20 years of your life, hopefully discovering, learning about yourself, like figuring out what am I actually good at and what do I like, and the further you get along on that while you're younger, the better, I think, the better it is. I think that a lot of adults are both are going through that too. It would just be easier if it happened earlier. There's nothing wrong with finding out later, late blooming and all that stuff.

In a lot of ways, I think of myself as a late bloomer. I was the kind of person that could have just incinerated time playing video games or whatever, and not felt really kind of guilty about it in any way. And I don't really appreciate that about myself. I actually changed when I had kids. And so I feel like I'm a lot happier if I'm sort of being productive, and moving forward, and regret sort of like empty calorie activities.

But, that's probably revealing my own insecurities. I don't know, but in any case, I think about, my kids are sort of like, hey, how, how can we get you to a place where you can understand the value of being competent and empowered by that, and hopefully make choices later on that are not driven by senses of scarcity or, I just got to go like, go make money or whatever, and maybe box yourself in too much.

So yeah, the option value stuff is just, you know, it's nothing formal. It's the stuff I think that a lot of parents just intuitively get. Expose them to stuff and let them see what they like, and nothing makes a parent happier than watching their kid sort of excel and you know, being able to get better at something.

I was like, my proudest moments are like, when you see your kid learn how to swim, it's just like an insane moment. It's like, oh, you couldn't do that. Now you can do that. And they're so proud of themselves. And then if you just take that and just amplify it across all the things that they end up doing, that makes you really happy. And that's a great guide for what I actually think you should orient yourself towards.

Maybe I'm misconstruing specifically what Adam said, but I think the big fear right now for parents, and providing option value for the kids, is pulling them away from the school system, and I struggle with that right now, currently, because they don't, they come home exhausted, and there's just very little energy left to explore other things outside of that very industrialized school system. So how do you think about balancing? They have to be good at maps, testing. But they…

[00:08:44] Rodrigo Gordillo: … explore.

And, you know, it's like, I have one kid that reminds me of me, and I have another. So the kid that reminds me of me is, he's good at school. He kind of, but he's also a bit ambivalent. Like I was a, I just didn't, first of all, I really disliked school growing up. It was a chore to go to it. I don't think he actually feels that way, but he's pretty ambivalent about it, but he's, he happens to be good at it.

The younger one is competitive, and he wants to, he's in a split class. He's like a third grader in a class with fourth graders, and whatever the fourth graders do he wants to outdo them, and he wants to do what the fifth graders do. It's like, he's just super competitive that way. So I can tell that I've got one kid that's like very, he's going to be self-motivated to just win, which is the way my sister was growing up. And I was just, what do I need to do to just get the A so my parents get off my back, was my attitude. I think my older kid recognizes that, and this is, maybe this is harsh, but like, we're kind of like, look, you go to public school, this is for the, for everybody.

You better get all these, like, it's just, there's just no, you don't really mince words about this. It's like, you know, my wife is Asian. It's like, this is just, this is just how it's going to be. Like, so, and, and I say that because I know that they are capable, right? I would not feel that like, if you had some, if there was something about them that said like, oh, they have something where this is an extreme burden for them to get A's, I would not feel that way. I would adapt to them, but in their case, they're completely capable. So you got to do good in school, but I tell them, so that's the bare minimum, because this is sort of made for everybody, right, and you need, you're going to need to go beyond that.

And that comes from, and I'll say this in these words, but it's, my feeling is want to, you probably want to have an interesting, above average sort of existence, growing up. I mean, or at least that's just, again, just reflecting my own insecurities. Like, I wanted to have, when I was younger, I knew that I wanted to make a lot of money one day, because I wanted to escape the kind of existence that I had growing up. So maybe that's just me imparting that into them, but I think school, doing good in school, that's the bare minimum.

Now I haven't gotten to the point where it's high school level pressures, and I know that there are kids doing four hours of homework a night, and all that stuff here. And, I'm pretty much taking a default view of like, you're going to need to get all A's when you go to high school, but we're going to see what it comes to when we get there. I'm a lot more interested in them caring, finding something they care about. Nothing would worry me more or, I shouldn't say that, but like, I would be more worried about them not finding something that they were really, that they really enjoyed, and thought that they were really good at. That would be more concerning to me.

So if my kid turns out, like, he loves writing, for example, and he's really leaning into that and he's doing that compulsively and maybe school isn't his absolute top priority, but I see that the level of commitment that he has to this other thing is special. That would sort of, like, make up in my mind.

And that's what I think right now. Again, I don't know how I'm going to feel in four years when he's in 10th grade, but that's, my feeling right now is that I would be okay with that. I mostly just want to see them able to get from A to B, be productive, and be effective.

And I think when you have a child like that, it's clear, there's no ambiguity, and I'm sympathetic to the view that every child may be like that, but they just haven't been exposed to the activity that captures their imagination and draws them in. But I do think most kids don't find that at least in middle school and in high school.

And so, if you haven't, and you, then you don't have the high enough marks to get into schools that will provide them with options for at least more traditional paths in the early stages, maybe they'll discover something that they're very passionate about, that's a little bit non-traditional in their twenties or maybe in their thirties, you know, but the clock does tick a little bit.

And so I do feel like not having a university education, a reasonably good school, even if it's a reasonably good state school, definitely from an option standpoint, you are truncating that tree of possibilities of your own life. By the same token, I'm also sympathetic to the view that, whereas, I think all of us can say that when we grew up, even though maybe none of us wanted to be in a traditional kind of professional role. Let's say nobody, we didn't grow up, the three of us, saying I'm really, I really want to be an accountant, or I really want to be a lawyer, or I really want to be a physician or what have you, right? We all knew that if things really, or teacher, whatever, right? We all knew that if we didn't really find anything that we loved or that we really wanted to build on or what have you, then we could go into one of those professions and still live a good middle class life, have a family, own a home, et cetera.

And I think it is really different now for a few reasons, is that I don't think that those traditional professional roles, when our kids graduate, I've got, my kids are a little older than yours, call it by sort of five or six years. When they graduate, those fallbacks are not really going to exist, because many of the professional jobs will be obviated by, you know, automation, AI tools, et cetera, and because it's just much more expensive to kind of climb onto the middle class, you kind of need to be exceptional in terms of the income that you're able to earn in order to climb into the middle class and have a family, like a traditional middle class family life, like we all kind of imagined it when we were growing up, right? So let me throw that out there. Like, my kids are a little older. I've also thought about this quite a bit. My kids are all very different from each other in personality. You know, this is kind of how I see things.

Then where I grew up, my college experience was way more diverse than the atmosphere I'd kind of grew up in. And, I also wasted a ton of time, a ton of time in college. I don't know anything that I learned there actually out of a book. But I'm super close with all these people from college.

It was so valuable as far as the experience of who I met, that it was worth every cent and more, just from the people that I met. So that is, I think is like an important aspect of the, like, if you think about college as a sort of good bundle of things that you can get, it's actually the people to me, in my, at least for me, it was, that was the highest value of it.

So, as far as the thing that you're going to do, like you're saying, like you're worried about I mean, it sounds like a little bit of this existential worry about automation, basically. Almost like a, I don't want to say like a universal basic income thing, but it's that sort of feeling behind it.

It's like, my God, like we're going to, what's going to happen to all the jobs, and I have no real forecast or anything like that. I mean, I think it's a, I think of this as a bit of a positional scarcity thing where humans are sort of there or, you know, on multiple axes, were sort of like organized in terms of like, capability. Like, you have talent, you have the ability to whatever talent means to you, whether it's intelligence, whether it's the ability to communicate, whether it's executive functioning, like you just, you're just conscientious, able to get stuff done. That mapping between sort of talent on whatever, however way you want to define it and like your outcomes, it's not, obviously there's a lot of looseness in that relationship, but there is a relationship there, I think. And I think that it holds no matter what the future holds. It's like, it's just maybe the whole bar, maybe, fine, like, we've automated all these things, but what's left is, you still got a whole bunch of people, and they're going to reorder that where they're going to reorganize themselves across talent and being very talented is still going to matter.

And what the shape of that or what the expression of that looks like, I have no idea. I mean, it may, I always think to myself, like, I feel fortunate to be born into this, into a time and place where I feel very comfortable with abstract ideas. Well, that's sort of rewarded today. If you can read, write and do arithmetic, that's very valuable.

I was born in Sparta, I'm probably out of luck. So, maybe the future will be so extreme that it would be so extreme that brawn mattered more than brains, or something like that, and in that case, I don't know. Yeah, then maybe what I'm saying is, doesn't really apply, but I really think that ultimately, if you're very capable, you're probably going to be capable wherever, and maybe that's how I'm thinking about my kids is like, I just need you to figure out that you can be capable, like, if you set out to do something, you can get it done and you know what it means to like, put your head down and work, because I don't know what the future holds, but I'm pretty sure that's going to matter, no matter what the future is.

It's the abstract thinker that has an issue with the school system, right? I actually think that one of the key values of AI today is it has the ability to completely change the way that we structure the school day for everybody and the different types of personalities, right? If, the way I see the future is more of, the abstract thinker is going to be the one that's going to be able to adapt best and provide value beyond what the AI can provide, in order to create a better life for themselves, and better society, and so on.

So, let's talk about some of the tools that we're seeing right now. You know, you talk about the kind of AI tools that you've been adding into your life, into your children's life, and you call, you talk about the flywheel of competence, confidence, and motivation. Using these AI tools, I feel like they're compressing the amount of time that is needed in order to get to the same level of education for kids, leaving one, one presumes a lot of time for ideation, creativity, attention, critical thinking, and kind of abstract thinking. So just walk us through what you've seen with your personal experience in using AI with you, with your kids and, and kind of shifting that, that, uh, learning curve.

The only thing he really, really cares about is playing basketball. So he does a lot of, he plays a lot of basketball on a lot of teams, but we're like, outside of that, for enrichment, there's got to be something you got to, you're going to do. And if you don't decide what you want to do, we're just going to pick for you. So you may want to step up here. So the thing he came to us with, as he said, I got an idea. How about this? I want to make bots in Rocket League in the game. And so we went on YouTube and so first of all, like he went on YouTube actually, and he found how to make bots, and you were going to need to use this thing called Python and you were going to need to put in this library called RL bots, and then he used ChatGPT, and the thing is like, he just basically did this all on his own. And all I'm thinking to myself is. oh, good, he knows how to be resourceful. Like, that's…

[00:24:59] Kris Abdelmessih: Like, as far as I'm concerned, that, like, my demands aren't that high. It's just, show me that you can be resourceful and that you just don't stare at blank screens. Like, hey, I don't know how to go from A to B. And I just think of all these tools, increase your learning rate, and, but you're still going to need, you still need to have the will to get through it. It's just, you're just going to be learning more at every, in every unit of time, but you still need to do…

[00:26:18] Adam Butler: So, and what if he, what if he didn't come up with something that he was keen to do and learn?

I'm just talking about the stuff that I care about, but like outside of sports. And so, or we'll do things like, you know, my wife is big on like, being, trying to help them be better communicators, be better speakers. So we will bring in teachers that help. We have one teacher in particular, like we bring her in, and she helps them be better communicators, and be able to articulate ideas, get their idea. Like, you know, they made a little movie over the summer with their cousins. We do this thing every summer called cousins camp and the eight kids all come to our house and I take them to the art studio where this teacher works, and they work on a project all week together, and then they spend their afternoons swimming, and living like they're in the 1950s. So the, but that is very conscious on our part. We want them to have that, we want them to be very strong interpersonally and be better communicators.

I wish I had that growing up. I feel like I've spent my adult life learning from my wife, how to just be a better human being, in a lot of ways. So that's part of it as well. It was like just things that we didn't know about, that are good to know, that are useful. We're trying to put it in front of them.

Had he, had he been, I would have wanted to do that no matter what, but if he was obsessed with playing the electric guitar and he wants to go down that rabbit hole, or like, fine, that's fine. But you just have to, you just have to do something, you have to care, and I understand you don't, you may not care, but then it is, I can't let you fill up your time with nothing. You can't just play video games all week long. So, which is, I don't think I'm saying anything there. I think every parent sort of feels like that. So it's just, I mean, everybody's just dealing with their kids, trying to get them off the thing that they feel is unproductive, you're just trying to, you're trying to get…

And then when he got a little nudge, he ran with it, right, and he learned how to do a bunch of the things on his own, and get the most out of, like install the Python IDE and figure out with ChatGPT, how to do that. And then how to begin to code with the RL bot library or what have you.

Like, it was this self-starter nature after the little nudge that was the real, the kernel there, right? If the kid was like, yeah, man, you know, I don't know. I don't, there's nothing really, you throw out a couple of ideas. Well, you know, you're really into this. Do you want to, well, no, not really. Well, what about them? No, not really. No. So then you're like, okay, we're, you're going to, we're going to put you in math camp, right, instead, right? So now you're just kind of like, okay, well, you're just not going to sit in front of the computer, right?

Like, my kids swim. Swimming is a huge commitment of time, right? If they had expressed a massive. burning passion to go and do something else other than swim, then I would have been delighted for them to go do something else. But they didn't. I mean, they all tried different sports, you know, at school and this and that, whatever. Some of them enjoyed them. Some of them didn't, whatever, but there was never a huge burning passion, and still to this day, there's not really, you know, and I agree, I think anybody, like the three of us, who are kind of naturally curious and love to go learn new things and try new things. I think the future is made for, it's a lot easier for people like that. I worry about those who, I don't think most people are like that.

[00:31:36] Adam Butler: I think there's probably some of that, sure.

End miniriff here

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I mean, this is, I happened to, I had an idea that I wanted to go into trading. I didn't have any, I didn't have strong ideas about it. I was just like, I think I want to go into trading. Honestly, my whole attitude was, I don't want to work that hard. I, bankers work lots of hours, and trading is this thing where like, the floor is only open from like this time to this time.

It seemed like, yeah, that's pretty cool. I could just work for like eight hours a day and I hear you make a lot of money like that. That's like, and then what happens is like you get good at something and then you grow to like it. And I just have a lot of faith in that process, that like, you get good at something and then you get all kinds of great feedback loops from the world, because the world tells you, the world says, oh, well you're, this is useful and you're able to do useful things with that, and you will grow to like it. And was I born to be an options trader? No. I mean, I thought I was going to, at one point I thought I was going to be a psychologist. It's not like it just so happened.

You know, like I think my impression, and look, I could be wrong, my impression is the vast majority of people are kind of like, yeah, I got a job because I needed to pay the rent, and I did the minimum needed to not get fired. And that minimum meant that I was able to raise my salary over time a bit.

And like, I don't know, I just, I would be curious for what percentage of the population, your story, which is very similar to mine, I suspect to Rodrigo's knowing Rodrigo's story, whether they would connect to that, or whether they would be like, yeah, no, that's not it at all for me.

It's like what you need to do is follow your level of competency, like fall, sniff that out, see what you're good at, and then get really good at it. And then you'll, because you're good at it, it feels good. And you will be passionate about that thing and make a lot of money. So I think that's kind of where we all landed, right?

Like I didn't, Same, same like you Chris. I remember sitting in my last year of high school and the counselor said, so what are you going to, what are you, what university are you going to do? I don't know. What do you think? What are you good at? Well, I'm good at math. And so, well, maybe commerce. That sounds good to me.

I literally just fell into almost everything that I've done and become competent over time because I was curious, but I do wonder all the time if I had been, if I had more time? So the university, you mentioned how it was a time of exploration, or you just met a bunch of people. You got to know kind of who you were. High school and elementary school is less of that. It's more, again, stringent. You have to, all your hours are accounted for. And so I do wonder what happens with like, some of the AI platforms that, uh, I'd like you to actually talk quickly about the math academy. I use my, my kid uses Khanmigo, the new chat bot with Khan Academy that actually doesn't give you the answers, but helps you think about those answers, because if we can leverage that, and some of the schools are leveraging that, I think you can, Adam, get more people at the margins to be like them, us, I personally think. So tell us about some of the tech that you're using.

And there was this couple there that was the, it was a couple there. They're both math educators. Actually, one of them I think was the, before that, was at Uber. He was an early Uber employee. And I think he worked on the algorithm that matched the driver to the user.

But, anyway, they're math people by background and they were, they'd created this program in Pasadena, which the long, the short of it is this. They took 6th graders and had them take Calc BC by 8th grade. And they were getting fours and fives on the AP exam. And the sixth graders that they took, these were, and I chat with the architect of the math academy program.

And so can I ask them like, hey, tell me a little bit more about that. And he explained to me, it wasn't like we went and got all these people that were top one basis point of the population. He says, we just went into the public that we were at the public school. And we just took, he said, the equivalent of the top half of an honors class, so maybe like, your top 5 percent of kids in math in school and said, we're going to try to see if we can do this. And they ran this, they did this program and they were very, very successful with it. And the great thing about that was that now you've got Calc BC under your belt and you're going into high school.

So they, he was able to, he personally was able to help these kids do some hardcore programming. Like they were using Python, but they were building the libraries then, so they weren't allowed to use the libraries. I had to build the libraries and he was like, they were doing Master's and PhD level work in high school.

And what they had basically figured out was like, you can go, if you have a very, if you're very, very efficient about learning, you can go really far very, very quickly. Now the thing was, now this is what drew me to the program, which was what does it mean for it to be efficient? Like, what does that, how did you do that?

And that's where, when you look at it, it's basically based on a number of CogSci principles that we know, that we've known about for at least since the middle of the 20th century. And it kind of rests on a few ideas. So, the idea, first of all, that you have sort of a working memory capacity, so you can only, or you've kind of heard the thing, like you can remember like seven, give or take two numbers, or you can remember four, or four chunks of information.

So you have a working memory capacity and you also, so if you've ever looked up anything about spaced repetition or done any spaced repetition, if you are trying to learn, basically when you learn something, the rate at which you forget it is going to be dependent upon how much the thing that you're doing is reinforced or reused.

So you're probably never going to forget your phone number ever again, right? But you learn some random fact and you're going to forget it in three days, if you don't use it. So, the rate at which we forget things follows these, follows like a function, it's a forgetting curve. So spaced repetition is the idea that if I can give you a dose of the thing that you want to know right before you forget it, that's like the optimal time to give you a dose.

So we know that we know how to help people remember things. Like, we know about the science of spaced repetition. We know about working memory capacity. And then, so what are some conclusions we can have from that? Well, it's the idea that if you have, I can never say this word, automaticity.

So you, for example, you have automaticity in addition, if you learn multiplication, you can't multiply effectively unless you can add, right? So the key is you need to have really, really fast retrieval on things that you learn, to be able to go further. And the reason for that is because if you have very, very fast retrieval, if the information that you learned is accessible, You are not burdening your working memory capacity, which you need to onboard the new thing.

So what ends up, so what they end up, what they can end up doing is, what they did is like, you know, in math, there's a hierarchy. It's like, if you learn, you know what prerequisites, there's a prerequisite graph. However, if you turn a prerequisite graph upside down, it's not symmetric. So it's not symmetrical.

There's another thing called an encompassing graph, which says, okay, if I have learned, if I review X, I have implicitly reviewed its children concepts, but that's, it won't be an exact map of it as a prerequisite graph, right? So what ends up, what they did was, and this is where like you, they needed, you need domain expertise, but you can, it's interesting to think about it in any field, like think about it in our field, like in finance, if you had to build an encompassing graph, which said, if I reviewed the concept of the, of X, what sub child context have I learned, reviewed implicitly?

Now contrast this with when you're learning words. Let's say you're using spaced repetition or flashcards to learn words. The cards are uncorrelated. So by reviewing some set of words, you have not reviewed any other words. Like, it's all uncorrelated, but hierarchical subjects like math don't work like that.

So there is an, if there is an efficiency gain that is possible by dosing somebody with the exact thing that they needed to review, which captured all the thing, all the sub child things that they were weak on, so you can pick the exact right lesson to give at the exact right time that minimizes the forgetting. So, or right before they forgot it, you would dose them right there. That is the basis. It's like that CogSci stuff is the basis for how they built this.

Now, none of this is possible with like, if you have, maybe if you have one human tutor that just maps your knowledge perfectly, that they could actually dose you the right way, but it's really a technology problem. It's an, and it's, so what Math Academy is doing is it is mapping your knowledge as you are doing, as you are going through it. It's totally personalized, which is just a, something that technology has opened the door to, so that you can do this now. And you know, it's whatever, it's like 50 bucks a month for this thing. It's so cheap compared to if you needed to get like a personalized tutor, there's no other way to sort of get the same experience.

One is, they did this in person, figured that, or where they ran the, they did the program in person with the kids, with the technology. And then they've spent, you know, I think reading about it, Justin spent three years building the algorithm for how it would dose you and what it would, and the encompassing graphs for every subject in math. I find the whole thing super interesting, because I'm like, oh, this is what other things could, you know, Math Academy for X, for Y.

Like, these kids are running Airbnbs, they're running their own, like a kid created a whole skating park and got the permits and got the money, got the loan, started running, it's making money doing it. Like that's an interesting way of approaching it, rather than saying, oh, you can learn faster. Let's get you to PhD level by the time you're 15 so that you can be the best academic by the time you're 19, right? So I think that's super exciting, and it's going to, I think the kids that are able to do that, in my view, that are able to take some time to be critical thinkers and think outside the box and do something away from, because my kids, you know, they got my, my wife's students, they are incredibly creative. They love to build things on a front, right. They're incredible writers. They could care less about math. So I just need to get them through the minimum dose for math so that they can do their thing on the creative side. So anyway, I think this is just a brand new, a brave new world.

It's going to be super exciting. And I think that some of the stuff that you've written has been useful for me to think through myself, right? So if anybody's interested in kind of thinking through, from a father's perspective, and some of the applications that you've had with your kids, you should go to Moontower. Is it Moontower.com?

Maybe there's a little bit of, you know, differences in the days that they trade and whatnot, but roughly speaking, we know what they're going to do. And so I just, your thoughts on, what rules-based options trading in the ETF world is, and compare that to an options mandate where they can actually generate alpha? So what are your thoughts on JEPI? What do you think people are doing wrong?

Yeah. And so if something gets crowded, you're going to, you're telegraphing everything you're doing and you're cooked. I mean, it's just like market makers, you know, it's like they're there. If they're setting the table on the screens, like a week before you come in and they walk it down, you sell.

You know, I know like some of the folks that I've like talked to on the front lines, it's like, they laugh because sometimes those executions happen at like mid-market, and it's like, these guys sold 25,000 options, like mid. It's like, well, yeah, because mid's not mid. Mid is, it's been walking down for three days because they know the order's coming, right? Now, that's a problem when you get really large, which is a subset of a wider problem.

I always say this thing, it's like markets are biology, not physics. The system, whatever the system learns, we all know that it's adaptive, it's adaptive learning. I don't know, whatever those buzzwords are. So we know that the markets are adversarial and they adapt. So if you look at a time series of, oh, this is like, always work. Well, it's not going to work if everybody knows it works. I mean, that's like the output becomes the input, makes, why would you think that nobody's learning here?

So, but that's just a general problem with any kind of investment strategy. I actually think, what's the way I would think about a product like that? And I'm going to, let's set aside the fact that whatever they're doing, maybe you can do it cheaper. Maybe you can do it in a more custom way. I mean, there's always a trade-off between a customization and the fact that they're just going to give you this risk exposure in a rules-based way.

But I think, as they build these things out, what I'm really thinking is like, you should have. You could imagine an ETF for every idea and then you could sort of manage in between them. Like, you think about it as a tool set and you're like, okay, well, I need a wrench.

So I need the thing that sells calls because maybe I figured out that right now calls look expensive to me. And so I'm going ETF that sells calls. Or maybe I think tails are cheap, so I'm going to go buy some tail, whatever the tail ETF is. And what you could do is like, you just have all this product and then you could, what you would want is, I mean, this is like speaking my own book in a way, but it's like we're doing with the option software, is trying to show you, this is if you have a vol lens, this helps you see what's high and what's low.

Now you can implement trades by actually going to the options market. Trading the actual individual contracts or the ETFs will be a way for you to just execute the same kind of idea. Now, are these things tax efficient and all that? Like there's larger questions that kind of hamper all product that exists, but conceptually, if the product is not too big and not so telegraphed in what it's doing, its existence is, I think, overall good. I would just get, and you know, if it gets crowded, then you can take the other side of it. So you just short it.

[00:52:03] Kris Abdelmessih: I mean, you can just harvest the management fee. I mean you're harvesting their management fee, harvesting the fact that they have bad execution. I mean, you're just taking the other side of it. It's like, if the thing gets short vol, it's okay. Maybe I can get long vol by shorting your ETF. The other, the issue there is like, you would expect again, markets are biology, not physics. You would expect the borrow to adjust. So I wouldn't be, I mean, I've never looked at it, but if the, it would be interesting if like the borrow rate kind of varied with like what the Sharpe’s wanted to do. I don’t know.

[00:53:00] Adam Butler: Well, give us a broader, give us the broad strokes on what Moontower AI is doing and then, yeah, what kind of applications?

They're completely agnostic about the underlying. They have no idea of what's going to happen to the market. They're just saying, I just have a view on the volatilities here, which is exact opposite. So what they do is like, they assume the underlying is fair and that the options are mispriced. And that's the foundational belief of their business, which is the exact opposite of everybody else that uses options. Whereas they have a view on the underlying, they have a macro view, or a fundamental view, or whatever it is, they have a view about the underlying and then they assume the options are fair.

So what we're saying is, well, we can actually look cross sectionally at the options market and get some idea of, okay, this is a bunch of liquid names. This is how their parameters are being priced, things like term structure and skew, and their relationship between their implied volatility and their realized volatility. That's what it looks like. That's what normal looks like. And then all the things that are off the curves, so to speak, stick out to you on these kinds of charts. And you can say, well, I think now you can, now you have something to look at. You have a candidate list. These things actually look like they could be mispriced.

Now I have to bring context to bear on this. This thing looks high, but it could be high for a reason. So, you know, I was never, I was not a quant or a systematic trader. I would use a funnel exactly like this. And then I would go and try to figure out is this thing that looks high, actually high, or are the generic metrics that we using, missing something that is very relevant right now.

And so you have to bring your context to it. But what I like to do with this is say, well, I have a view on the market. Maybe you do have a, you're, we're marrying both things. Like, I have a view on the market. Like, maybe I'm bullish. Where are, I mean, maybe I want to buy calls cause I'm bullish. So where's the call skew cheap or where's the vol, where's the vol cheap?

Maybe, or actually what I'd really do is say, what is expensive? What's a form of beta that's expensive in the marketplace? Like what's a name, what's either an index, or a name like Apple, which I know has a lot of beta. It has a lot of representation in large indices. Now say, okay, take Apple, is Apple the cheapest place to get long market exposure?

Like then is it, does it have the cheapest calls? Or maybe it has the most expensive puts that I could sell if I'm bullish. And if the, or maybe the calls are high, but the vol is low. So then I could buy a call spread. So I buy the, at the money and I'll sell the call. Whatever your bias is, directionally, there's an options trade as long as you figure out…

[00:56:32] Kris Abdelmessih: It'll be different every time, but you got to figure out first, does the option look off? So we're saying, is the option off or not? Does it look, does it stand out, and if it stands out, there's a trade, no matter what your bias is. There's a trade. So that's, and then that is, options are surgical tools. I mean, it's like, I talk about this all the time. Like you have, if you look at a stock price. You have two stocks. They're both a hundred bucks. One's a biotech stock that has a 10 percent chance of being 10X. And that's why it's a hundred bucks. It's a 90 percent chance of being zero. And another stock is a symmetrical sort of outcome. It's like, it's 50 percent to be up or down 10%, but they're both a hundred bucks.

I mean, you know nothing from looking at the stock price. So if you want a three dimensional view, a real understanding of the distribution, the options market tells you what it is. So you can kind of craft it, the shape of the trade you want to do there. In this case, in the options market, in the $100 biotech stock, the 300 call has a value because the stock's 10 percent to be worth a thousand.

In the stock that does not have that kind of a distribution, the 300 call’s worthless. Well, the options market will tell you what the distribution is. So you can be very surgical about what is my thesis, and what is the right trade to express my thesis? And the value of doing that is that it's the whole concept of, you know, Augustin LeBron wrote that fantastic book, Laws of Trading.

What's the, one of the core ideas? You only take the risks that you're being paid for. Only take the risks that you actually have a view on. You don't want this, all their other basket of risks. So if you are trying to trade for alpha, you want to be very, very surgical. If you're just trying to harvest a risk premium, like I just want to be long, you know, half my portfolio is just going to be in passive long equities, because it's just like, I'm being paid for owning this stuff over a long period of time. You're not getting paid for your labor. You're just getting paid for patience there. So, then fine, do that. But if you want to be, if you want to actually control, or you want, or you think you have some kind of an edge on your views, then trading the stock is a pretty blunt way to do it. The options are more surgical, but if you don't actually understand how, what vol surfaces say…

[00:59:00] Kris Abdelmessih: … this is the learning that you have to do. So we identified the problem. It's like, oh, I know that options are a more surgical tool, but I don't really understand options. And at the end of the day, what is the whole Moontower thing is like. I can teach you what, how to think about options, how to think with a vol lens. That's the whole idea behind it. So the tool is a very much a progression of walking through. I mean, there's a lot of tools out there. I say that ours has a point of view. It's like, I'm going to take you from you, you have this feeling. I'm going to walk you through how to think about this. Like if you think the stock market, like I kind of wrote a thread yesterday that people like, but it was about the idea, like after the election, I think it would be normal to feel, it's a normal sentiment that people feel bullish, whatever it is.

Maybe the taxes are going to be lower, whatever. So people are all bulled up on the market. So if the market goes up in my language, I would call that a stabilizing move. It's what's expected. If the market were to just tank 20%, this would be more shocking than it normally would be for that.

It's incredibly destabilizing. Nobody thinks that's going to happen. So if you translate to option language, that's your put skew is higher. And the probability of the stock going high, higher is also higher. They're both higher. So that means your call spreads should be worth more. Your put skew should be worth more.

So if that's what the sentiment is, if we can just, if we can look at that and say, well, what is the price for that package? Well, how does it look? What does it normally look like? What does it look like today? And if it's very, very cheap today, you have two choices. You could say, I'm going to buy it because I believe that this is true. You could also say, whoa, maybe my belief isn't so consensus because the options market seems to think something otherwise. So the option is like this, the option market is this great sparring partner. Because if you come to it with a thesis that is that with a, with non-fuzzy thinking, you approach it and say, I actually have like a very specific way of seeing things, the options market will either agree or disagree. And if it disagrees, you may have a trade or you may have something to update your priors with.

[01:01:44] Kris Abdelmessih: Yeah, so the heart of it is a bunch of charts. It's like, where I was like, can the charts that have been the exact charts that I've been looking at for 15 years, the, and then the AI engine is we built a chat bot that is trained on everything. Like basically it goes out every night on everything I've ever written. It ingests it, and so you can ask it options. Like, you can ask it any question about markets and it will give you a response and it will give you what, like, the references. It gives you a nice response that you can say, hey, how do you compute forward vol? And it'll teach you how to compute forward vol.

And then it will link to the article where it got that information from. We actually, it's, we're re-releasing it this month. We took it down and we're upgrading it. Where we're going with that is that chat bot is going to be, is then going to connect to our data infrastructure. So then you'll be able to ask it a question like “Hey, is put skew one thing in option markets?” When vols get really low, put skew tends to get very high as a percentage of the at the money vol. There's just some stickiness to out of the money puts that you wouldn't expect them to just get as cheap as the vol came in. So, you could say something like, “hey conditioned on vol being below 12, what percentile is the put skew in, rather than on the unconditioned version of it?”

So that's like the kind of question I would like to just ask the robot, and it just gives me the answer, it gives me the chart. It's basically what you'd want an intern to be able to do, and we would just want to automate that.

[01:03:34] Kris Abdelmessih: Oh, I cannot wait to replace myself.

[01:03:40] Kris Abdelmessih: Totally.

[01:03:43] Rodrigo Gordillo: Well, thank you for sharing that. Adam, I know you need to get, hop in. So I really appreciate your time, Kris, and anything that we missed that you want to add, talk about with regards to the product or…

It's very, very, we try to be super thoughtful, and I try to make, we really try to make things as simple as possible without losing the nuance that is in options. I mean, I think, I know at the end of the day that there is a, everyone wants to just be like, is it red or green, man? And I'm like, I never thought like that, that everything is like thinking probabilistically. And we try to bring that through. And I hope that, even if you don't trade options, this is a big thing. We offer a lot of free stuff on it. Even if you're not paying, you can get access to all the education.

There's a primer in there. There's two different learning documents, and I strongly believe that no matter what you do in investing, these documents will totally upgrade your thinking. So at the very least, I think that's a great thing for people to check out.

[01:05:26] Kris Abdelmessih: I'm on Twitter at Kris Abdelmessih, KRIS ABDELMESSIH, and yeah, that's pretty much the only thing I do on social.

[01:05:45] Adam Butler: … a lot more time. Yeah.

[01:05:55] Kris Abdelmessih: Maybe I'll get a hologram of myself on there. Maybe.

[01:05:59] Kris Abdelmessih: You know, I won't have the gray hair when that happens. I'll use a…

[01:06:10] Kris Abdelmessih: All right. Likewise. Thank you guys so much.

[01:06:14] Kris Abdelmessih: All right. Later.