The Square Root (√) Pricing Rule
If you don’t understand square roots, you’ll make one of the most common mistakes of buying short-dated options and selling long-dated ones. Traders often buy short-dated options to “lower the risk,” and they sell long-dated ones to collect more money. It makes sense until you understand there’s a square-root pricing relationship that’s working against you. What is it? And how do you use it to make better decisions?
What is Contango and Backwardation
Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.
Infinite game
There are at least two kinds of games: finite and infinite. A finite game is played for the purpose of winning and must come to a definitive end, such as football. There are known players, fixed rules, and an agreed upon objective. An infinite game is not bounded by time and the objective is not winning but ensuring the continuation of play. The rules may change, the boundaries may change, even the participants may change. An infinite game continues with you or without you, like business or politics or life itself.