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Economic Symbiogenesis

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Economic Evolution Thomas J Novak
Disclaimers 1. I wish to contend that Micro and Macro Economics each constitute a hidden branch of evolution. To be clear, I’m not arguing for an analogy, ​I’m arguing each branch is an evolutionary process; and with this comes the mathematical framework needed to scientifically ​objectify success (major goal for every Capitalist). 2. The quantitative aspects are partially rooted in Game Theoretic Evolution. I do not expect this theory will garner majority support or ​understanding. It is only an esoteric theoretical ideal; but it is my hope that this will gradually change until one-day we have a Utopia. 3. The mechanism is voluntary through rational self-incentives. It advocates for a change in perspective for optimal decision making purposes. 4. Dollars and other fiat currencies are still completely necessary. Fiat currency constitutes a valuable technology that eliminates the need for ​bartering, yielding considerable savings in life’s prime asset - TIME. 5. I apologize to the reader in advance for the long essay. I hope it is "worth" your time.
Key Conclusions
Present day humanity is full of capitalists that have the right idea but are missing some key math. This is causing them to behave inefficiently in the context of their own self-interests. Ideal Capitalism is Pareto Optimal and should be practiced by all; and it should lead to maximal economic growth. I also wish to conjecture that a new Nash Equilibrium is available to our race: Perpetual peacetime under the individual Pareto Optimal Strategy of Ideal Capitalism as every individual looks to maximize their self-fortune and troll farms are voluntarily dismantled. If this sounds too good to be true, note that it very well may have been for all of human-history save the last few decades. Key developments are nuclear weapons and the internet. Discussed more in the last section.
Introduction
The "science" of Economics is not yet a science. Don't get me wrong - micro-economics is just about there; but macro-econ is a totally different story. Some call it “The Dismal Science” because it makes many quantitative claims that are inconsistent with empirical data. An example is the claim that John Rockefeller’s fortune could be made comparable to contemporary fortunes by adjusting his dollars for inflation and real growth. In fact only adjusting his hours for real growth does the trick.
In general macro-econ has a zero-sum-dollar-centric structure that does not allow for input of things like maternity and child rearing - two fundamentally "valuable" human activities. Another problem is that planetary-wide risks like war, (and that which is assured by "Mutually Assured Destruction" (MAD)), are not naturally measurable in dollars.
Some concepts from financial mathematics and science can generalize economic measurements into a co-compatible theory that almost seems too simple to be necessary. Basic results agree with common sense in every way. Some conclusions are so obvious the calculation seems pointless. Others might be beyond common sense similar to the notion that the Earth on which one walks is anything but flat. The former supports credence for the latter. All examples of human stupidity supports a need for all of it.
Ideal Capitalism
Most powers past through present can be thought cold, "calculating”, and self-interested; and most presently embrace association with Capitalism. Paradoxically, human history, (even recent), is a litany of fighting and stupidity and hurt feelings. These are inefficiencies from the Capitalist perspective, so something must be wrong with these “calculations”.
The argument will start with a Micro-Economic exercise intended to provide quantitative framework to measure just how unCapitalistic many present-day capitalists are acting, by unitizing all their actions in a scientific manner. Any Capitalist wishing to maximize their net-worth will be made more materialistically rich simply by maintaining complete indifference about others, understanding the entire picture, and trusting numbers. Wall Street can confirm this is its goal.
“Complete indifference” means precisely 0 concern for anything other than material-self-worth and 100% concern for material-self-worth. Nonzero concern for others, positive or negative, is suboptimal since it distracts from the objective of maximizing self-worth. Footnote 1: “Others” does not include the friends and family category. All intentional altruism can be represented easily by having those individuals' interests summed and grouped together so as to be viewed as part of the Capitalist’s “self-interest”. All reasoning forward is unaffected by how many friends and family are now implied to be included.
The results can empower all decision makers to calculate in the only way possible: with actual mathematics. The numbers will sometimes disagree with intuition; but the numbers will always be correct. The optimal strategy will hardly change except for sufficiently wealthy individuals. The proof can be seen empirically by back-testing the model in history on the domain in which all success is measured: quality-weighted-time (qwt). The definition of qwt will leverage Game Theoretic Evolution and is discussed more below.
Some conclusions may be counterintuitive similar to the way natural selection favored Symbiogenesis; but maximum profit calls for absolute “trust” in numbers above all else - exactly as exhibited in microbial evolution. Any call for “selfless” acting resulting in benefits to others is strictly incidental; and any less is unselfishly selfish in that it renders this inefficient capitalist less wealthy than maximally possible.
Step 1 - Any political bias about aiding others should be deleted. An “Ideal Capitalist” expresses precisely 0 concern for others and what others think - no more, no less. As long as an individual is correctly acting in their own best interests, they are acting as a Capitalist. Contra-positively one can claim to be a capitalist and act inefficiently against their own interests as many “capitalists” will be shown are doing today. I suggest a new term “Maximalist” to mean an Ideal Capitalist and avoid the need for case sensitivity.
Step 2 - Success Spawns Success. What is meant by quality-weighted-time? The definition comes from the only objective arbiter possible: Evolution through Survival of the Fittest. Something is “fit”, or “successful”, if it results in more quantity (Q) or more quality (q), where more quality means it produced more Quantity faster - which renders it more successful. This is The Tautology of Evolutionary Game Theory (The Tautology). For any evolutionary process, quantity is the metric which quantifies success. Quality is measured in quantity per unit of time (q=Q/t). Note that multiplying q=Q/t with t yields Q=qwt: the metric of success that necessarily satisfies The Tautology. Footnote 2: The word “tautology” is meant in the propositional logic sense. No negative connotation should be inferred.
Step 3 - How to connect economics with evolution?
Micro-economic decision strategy for trading time (t) for dollars ($), (or $ for t), amounts to a “phenotype”, (or observable trait), coded for by genetics inherited or mutated, and ideas learned or created. Respectively: - Inherited genetics constrain every rational human to be “risk averse”, regardless of self-perception, because natural selection favored and continues to favor risk aversion. Defined below and proven further below. - Mutated genes are almost never favorable for a human so this case will be discarded (although this force is quite powerful over quintillions of human-hours). - Richard Dawkins creatively postulated ideas to be “memes”: new evolutionarily viable packets of information, subject to selection forces, as they spread from person to person with varying levels of success overtime. Respectively gene inheritance and mutation is analogous to meme learning and creation. Furthermore the economy can be seen as a subsection of the biosphere governed primarily by evolution through forces of selection. The economy evolves through selection of both genes and memes, and memes are more abstract; but this should not change anything about the evolutionary game theory. After all humanity itself is naturally occurring, so Artificial Selection of Genes and Memes can be seen as a more complex extended phenotype coded for by the evolution of genes through Natural Selection. Any argument that “Artificial Selection” constitutes a meaningful difference from “Natural Selection” must first come to terms with the observation that humanity is itself, naturally occurring.
Step 4 - What is the definition of “risk averse”? The mathematical definition of risk averse simply requires diminishing returns to be experienced on assets like dollars. For example: an additional $1M adds less “utility” if you presently have $2B, compared to if you presently have $2M. If a person is not risk averse, then more success encourages more risky behavior. This is inconsistent with the observation that more success means one has more to lose. Therefore any risk-inclined individual cannot be an Ideal Capitalist as they will almost surely go broke gambling.
Step 5 - What is “utility”? Utility is the abstract micro-economic concept that, by definition, quantifies value. The unsettled question of how to actually do this is addressed below.
Total Utility = True Material Self-Worth = “well-offness”. All have one-to-one correspondence with each other. All are “mutually inclusive”. For example: twice the quantity of utility, by definition, means twice material self-worth; and so, the individual is exactly twice better-off. Diminishing returns do not apply to quantities of utility.
Step 6 - How to define an objective function to maximize utility? Per Wikipedia: “Consider a set of alternatives facing an individual, and over which the individual has a preference ordering. A ‘utility function’ is able to represent those preferences if it is possible to assign a real number to each alternative, in such a way that alternative A is assigned a number greater than alternative B if, and only if, the individual prefers alternative A to alternative B.”
Keynote: dollars are not material wealth, dollars buy material wealth, with diminishing returns, limited by genes, memes, and the quality and Quantity of the Marketplace (respectively qQMP).
To illustrate this, consider how rich you would be with $1T cash on Mars in the present day marketplace. Personally as an oxygen breathing Capitalist, I would view my self-worth as constituting a liability - measurable in my personal subjective frame of reference in units of time, weighted by some self-knowable quality of life representing the quantity of misery per hour that I experience dying alone. Presently the quality of the marketplace on Mars is exactly 0 because 0 quantity is available for purchase. Footnote 3: The quality of life purchasable given the Time and Place is shown below to be bounded from above, although it is by no means bounded from below.
Back to Earth. If sufficiently rich, then maximizing material wealth calls for buying everything in desired amounts to maximize present quality of Life (qoL), holding ample dollars in reserve to spend on future qoL (like new inventions) and future quantity (like new medicine), and allocating the rest to increase future qQ which is not presently available for purchase. In keeping with The Tautology, qoL enhancements will provide for faster consumption of Quantity (Q=qwt). Note how perfectly this fits with The Tautology.
Ideally a good Capitalist with sufficient dollars would employ a strategy so as to maximize qoL at every point in time by exhausting most/all dollars by death. Any argument that an individual cannot meaningfully increase future qQMP fails. As an example: a medical breakthrough for genetic predispositions could yield considerably more time for any one capitalist, with expected returns modeled via actuarial mathematics. Consider just how far Humanity has come since the birth of The Enlightenment - it is easy to see how the not-so-distant future may include considerably more qQoL for sale. (Conversely the future may include far less qQoL if macro-decision-public-policy modeling continues to fail to quantify/unitize the cost of war - discussed more in the Macro Economic qwt section below.)
qQ enhancements, although more subjective, can be substantially accelerated by one talented individual. Examples include Albert Einstein, Bill Gates, Steve Jobs, Jeff Bezos, and Elon Musk. All are responsible for inventing and/or producing new things which I personally enjoy - the qQoL that I can purchase is greater as a result of their work. My time and money could not purchase such things if they were not invented. As discussed next, micro-economic quality weights are quality of Life (qoL) weights. They have an upper bound that can be “objectively” unitized and measured by the self-interested party's own frame of reference.
Step 7 - How can an individual objectively define an upper bound for these inherently subjective quality weights with any mathematical rigor? Is it possible that more dollars does not always result in more utility? Yes!
Proof Reductio ad Absurdum
Ripping off an idea from one of the greatest thinkers ever - I propose a financial thought experiment: pretend it is possible for you to pause all of society and gamble once at the “Name Your Winnings Casino”.
Here you can choose entering into an even bet: 50% of the time you win the largest number of dollars you can mathematically express = $P; or 50% of the time you suffer absolute ruin: the casino takes everything of material value and your dollars and returns you to the real world where no insurance policies exist for you and no friends or family are able to ease your loss by lending a couch to sleep on or pulling strings for a job offeinterview. If you lose you reenter the world a naked homeless person “worth” exactly $0.
Four observations follow:
  1. The decision to bet is made independent of any consideration of others, consistent with the Ideal Capitalist.
  2. Any sane human with the smallest capacity for self-honestly could conservatively estimate a walk-away number A, (denominated in dollars), such that if present “net worth” is greater than $A then no bet.
  3. No rational person choosing to bet would play more than once because either they’d lose or they’d win $P and have received the payout they named. “Letting it ride” constitutes an obviously dumb decision born out of the unwillingness to simply express the larger number in the first bet; however, a risk-inclined individual always values more over what they have and so they would be compelled to keep betting. Therefore rationality is mutually exclusive with risk-inclination. Furthermore if the betting person is risk averse, then $A is strictly less than $P for some minimum value of $P.
  4. Some confident rational individual might argue no such number $A exists for them because they’re so good they can start all over if they lose and earn a new fortune; and it would at first glance seem this individual is correct.
Many logical conclusions result:
A. An honest estimate for $A irrefutably reveals a hidden upper bound for this individual’s “Utility Curve”. Specifically if the function A’($A) = A’ maps to utility derived by $A dollar denominated “wealth”, then no amount of dollars even exists for this individual to choose to bet. Mathematically: “Net worth” > “Bet value” => “Net worth” > “50% times upside minus 50% times downside” => A’($A) > .5A’($A+$P) - .5A’($A) => 1.5A’($A) > .5A’($A+$P) => 3A’($A) > A’($A+$P) for all values of $P (The left hand-side must be greater or the bet would not be declined by a rational individual.)
B. 3A’ is not presently purchasable with any amount of dollars. 3A’ may be purchased in some future marketplace, (possibly with less than A future dollars), in the form of a medical breakthrough or buying future children birthday presents, but it is not currently purchasable in the present as demonstrated by the individual’s refusal to bet. Conversely A future dollars may lose “purchasing power” of just A’ if the future marketplace is inferior. Therefore true material-worth is fundamentally a function of the marketplace and cannot even be expressed in terms of dollars.
C. Most choosing to bet would logically express the upside payout $P as a sequence of 9s. Many more would know to use powers of powers. Knowledge of Knuth’s Up Arrow Notation could simultaneously save time and yield considerably “more upside”. Due consideration for exactly how much time should be spent writing out fantastically large numbers reveals an irrefutably objective hidden limiting factor: this person’s lifetime - measurable in units of time. This reveals one of two hidden domains on which value must be measured - TIME!
D. From this it directly follows that the confident individual in (4) is wrong. Some number $A<$P must exist, EVEN FOR THEM. However this individual is sure $A doesn’t and keeps writing numbers out for $P until they die. Therefore $A for them equals the number they have written out at time of death, never having played the game. I believe this is the definition of a Darwinian unfit capitalist - completely inconsistent with the Ideal Capitalist.
Analysis
The argument above establishes a horizontal bound for utility – lifetime measurable in units of time. It also establishes a finite upper bound for utility itself (represented by the area of the “utility rectangle” - see spreadsheet). This implies a finite upper bound for the rectangle’s height must exist; and this is empirically supported by the observation that billionaires are not known to blow through their life fortune in any short-period of time.
So why does any sufficiently wealthy capitalist focus on earning more dollars and die before exhausting most/all of their dollars (last death if family inheritance involved)? If sufficiently wealthy, material wealth is necessarily a bounded function of The Time Period, or the “quality and Quantity of the Marketplace”. TTP = qQMP >= qQoL. In other words, the marketplace itself is secretly an asset for every Capitalist!
qMP(TTP) = Max quality of life, or “max utility per hour” available for purchase in TTP QMP(TTP) = Max Quantity of life, or “max utility” for purchase in TTP (IE a longer vacation or medicine)
Thus on the micro level, quality weights are utility weights; and utility weights are capped by The Time Period. Thus it is the case that for every (finite) individual, a finite upper bound for utility is self-measurable in Time Period-Weighted Time (qwt = TPWT). For example: 2020 hours have far more value to any sufficiently rational and wealthy individual (SRWI) than 1920 hours. And as the earlier questionnaire (hopefully) shows, this is realizable by most middle-class people today. In other words, today’s middle class is sufficiently wealthy to the extent TPWT resolves the Rockefeller paradox. Footnote8: The size of the middle class itself is unfortunately shrinking. This has potential to result in negative externalities for all.
Since an Ideal Capitalist maximizes self-material-wealth above all else, then if they were also sufficiently wealthy, they would measure value in Time-Period-Weighted Hours since they would always purchase maximum utility per hour. This is by definition, since any SRWI has all necessary means to purchase max utility available per hour. (Note just how important quick access to true information would be.) Footnote 9: Neuroscience could use Magnetic Resonance Imaging (MRI) to objectively measure the Micro-Economic utility unit as “Neurotransmitter-Molecular-Count Weighted Hours”. Consideration for how to weight different neurotransmitters (like Serotonin vs Dopamine) would be necessary. For now, we are all similar enough for “time” to suffice, at least for short run measurements. For example: what is the penalty for severe crimes? “Time in jail” or death (all the person’s time).
Quantifying the Marketplace
Given the average life expectancy now is more than twice that of prehistoric man, the marketplace itself is worth strictly more than 50% of any sufficiently wealthy individual’s “asset portfolio”. Just note “time is money”. Footnote 10: They need not be rational to "realize" this time, so long as their doctor is sufficiently competent. "Realization" will come in the form of living longer, quite consistent with the accounting definition of gain/loss realization.
Keynote - a Maximalist will do more than just maximize present qQ purchased. They will also divert unneeded dollars to maximize future qQMP so that more qQ is available for purchase. Thus the Maximalist calculation includes due consideration for additional dollars that will be needed given future qQ becomes available.
Squaring Theory with Reality
Most already know most of this, at least on the common-sense level. So why don’t sufficiently wealthy Capitalists invest maximum dollars with less strings attached to maximize the future? Is it because that would help everyone else and constitute socialism? No! In this context socialism is Adam Smith’s “Invisible Hand”. A good Capitalist aims for precisely 0 concern about others, and any concern for implied socialism would constitute nonzero concern. Such concern would amount to incomprehensible irrationality far beneath any good Capitalist. So what else could it be?
Perhaps it’s simply the fact that much of humanity is still measuring their net-worth in the wrong dimension for the inefficient purpose of feeling superior to others with less money. Anyone currently doing this quite literally knows the price of everything and the value of nothing, not even their own self fortune, because they are using the wrong dimension of measurement. quality-weighted-time is the objectively correct way in which real value should be measured, and quality weighting is limited only by The Time Period in which time and money are being spent.
More noteworthy, any human mistaking dollars for qwt for this scorekeeping reason is still violating the prime rule of being a good Capitalist - they are demonstrating nonzero-concern for what others think of them. Implicitly and inefficiently, these individuals are expressing negative concern for others, as now is measurable by how worse off they are in units of their time. Specifically this is calculable as the opportunity cost of not investing more dollars for an enhanced future marketplace, measurable by others in said marketplace by the cost to this imperfect capitalist’s life expectancy, (all unitized in units of time).
Equity Miracle Swap Instruments
Perhaps the above explanations are not exhaustive of the full truth. Maybe some sufficiently wealthy Capitalists simply do not have the means to invest their dollars in a way that can reliably pay greater dividends. Therefore I propose a new type of financial derivative instrument called an “Equity Miracle Swap”. These would be voluntarily issued as contracts from the mega-wealthy. Here is a hypothetical example:
Rational (and thus risk averse) Billionaire-G (BG) possessing $100B in dollar-denominated-capital can now do research and will likely find they are genetically predisposed to a (presently) incurable illness (let’s say Small Cell Lung Cancer = SCLC). BG could use the chancy math in the proof above and might determine that Billions $91-$100 have minimal true value to him/herself when converted to qwt. Therefore BG could decide to start up an enterprise to find a cure for SCLC and use a $10B Equity Miracle Swap = EMSSCLC-$10B, or just “EMS” for short. The purpose is to maximally incent the researchers, who might otherwise just be employees. The contract would stipulate that all equity in the enterprise transfers over to the research team only upon successful development of the cure.
When measured in dollars, the payoff for BG is represented by the performance of the stock, which is greater than -$10B if no cure; or -$10B if the miracle cure is found. The former is greater than the latter. Which do you think BG will prefer? Obviously the latter, especially if they wind up contracting SCLC in the future! But the former was greater measured in dollars? How to reconcile?
This can be quantitatively reconciled by using the correct unit of measurement - qwt. Here is how: the newly discovered cure might empower their remaining dollars to purchase considerably more qwt in the future. The real expected return on investment for BG could be calculated actuarially as follows: Expected ROI = { Expected Return }/{ Investment } = { E(Δqwt | Miracle) * [ P(Miracle | EMS) - P(Miracle | no EMS) ] }/{ A’($100B) - A’($90B) } Where: 1. A’($D) maps to utility measured in quality-weighted-time presently purchasable by D dollars 2. E(Δqwt | Miracle) = Expected change in purchasable qwt given miracle cure occurs in lifetime 3. P(Miracle | Event X) = Probability of Miracle given Event X
Note that because BG is risk averse, diminishing returns render billions $91-$100 worth very little qwt. Therefore the cost in the denominator = A’($100B) - A’($90B) constitutes a very small amount of qwt, rendering the expected ROI very large, even for relatively small changes to P(Miracle). Obviously the lawyers could tinker with the terms of the contract. Finally note that society is incidentally made better off if the cure is found.
Macro-Economic qwt
Please now consider the benefit of a qwt-centric model from a Macro-Economic standpoint in the context of the Doomsday Clock, where as always, economics can objectively measure value (or “GDP”) in units of quality-weighted-time. On this Macro scale, the quantity unit will be "Healthy Human Hours", calculated as always by multiplying quality weights of presently healthy humans, with units of time, where any human is healthy if he/she produces more future human hours. Note how naturally maternity and child-raising now fit into GDP.
This may also help resolve the argument over which crimes should be punishable with incarceration - specifically only crimes where the individual is deemed likely to contribute less negative future qwt to GDP when in jail vs when out of jail. Also there is a natural extension of this for the death penalty, although I do not wish to make such moral judgements. Footnote 10: Any argument that population overgrowth leads to mass death is correct. Policy models need only step back and estimate healthy human hours in the more distant future. Calculus can be used to model public policy decisions from present-day infinitely far into the future and compare infinite relativities for different policy options.
Also consider that actuarial modeling could be used to objectively estimate the cost of disinformation posed to every Capitalist on the planet, measurable of course, in units of time. Specifically calculated as expected changes to Humanity’s Expectation of Life on the Doomsday Clock, plus individual life expectancy given Midnight, times the probability of midnight. Also observe the need and means for due discount in modeling the "decrease" in the future qQMP (which might include radiation).
The Emergence of Economic Symbiogenesis
Try to arrive at the conclusion any good Capitalist must. Here is a hint - genetic Symbiogenesis resulted in the planetary-wide cooperation of all plant and animal life to regulate Earth’s Oxygen concentration. Note the immense success is, of course, measured in qwt. Weighting in this context needs to satisfy the same tautology as always. Therefore the final answer on this Mega-Macro scale comes in organism-count-weighted units of time. This is the current game strategy that genetic Evolution has concluded on Earth to date. It came from pitting individual selfish microbial interests against one another in the 0-rules game of survival of the fittest. The result is the current marriage between the Plant and Animal Kingdoms! (Like all great marriages there are still a few mentionable skirmishes.)
Also observe the micro-macro relational analogue between Chloroplasts and Mitochondria with Plants and Animals. Consider how this might analogize individual decision making with the marketplace as a whole.
If you are religious, consider just how correct this implies your understanding of God’s wish for the general wellbeing of every individual to be.
My conclusion is that there is a trail of breadcrumbs for our species to follow and we’ve had the right idea all along. We’ve just been doing the math wrong. Now every decision maker can better understand how to measure their own self-fortune and get to growing it faster!
Also interesting is the game theoretic argument for why every person must be allowed full forgiveness - it is the only way world leaders who are concerned for their own wellbeing could possibly embrace such a model. Astonishingly full forgiveness is 100% consistent with every major religion’s claim of what God hopes all of us can achieve. In economics, any desire for revenge can now be seen as The Sunk Cost Fallacy, measurable as always in units of qwt.
Finally, I wish to conjecture that a new Nash Equilibrium is available to our race: Perpetual peacetime under the individual Pareto Optimal Strategy of Ideal Capitalism as every individual looks to maximize their self-fortune and troll farms are voluntarily dismantled. If this sounds too good to be true, note that it very well may have been for all of human-history save the last few decades.
Key Technological Developments 1. The advent of nuclear weapons which align all of humanity's interests in a way which never used to exist. Even survivors of a nuclear war will be far worse off, now as measurable by decreases to the quality and Quantity of any future radioactive marketplace. Less qwt for purchase! 2. The advent of the internet renders information around the globe nearly free and instantaneous. If we can learn to be more self-interested, the only conclusion which rationally follows is to dismantle all troll farms for the simple purpose of maximizing Macro Time until Doomsday. The New Nash Equilibrium available to our race could be quantitatively modeled with actuarial techniques, and the optimal solution is to push Midnight infinitely far into the future by allowing every rational decision maker the means to make rational decisions with 100% true information. The internet sets up a worldwide analogy with our nervous system.
Footnote 11 - The Micro-Economic Model is now consistent with John Lennon's definition of life success: happiness. When asked what he wanted to “be” when he grew up, John responded "happy". John’s teacher thought he misunderstood the question. If John's teacher had instead followed up with the question to quantify: "How happy do you want to be?" - John could have replied: "as happy as possible for all my years.”
Footnote 12 - Warren Buffet's advice to "do what you love so you never work a day in your life" is quantified naturally by the model. I hope that more will start to take this advice. The qwt-centric-micro-model shows they will quite literally be made richer as a result. Given that richer people tend to contribute more to GDP, society will be made incidentally better off as a result. Star Trek almost had it but missed two words: “we work to better ourselves, and incidentally, the rest of mankind”.
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Using Spreads 2: a slightly more advanced guide on how to stop getting destroyed by theta

My last post was more successful than I expected, so here is my next post as promised. If you missed the first one, you should read it first: since I'm going to be assuming you know the stuff in there already (in addition to the absolute most basic concepts like IV and what it means to buy and sell a call, if you don't you should probably do more than 5 minutes of research before trading financial instruments worth thousands of dollars, I said this last time too but apparently you autists are also illiterate)
Disclaimer: Unless I say otherwise, I'm assuming we hold everything I discuss here to expiration day because it's much simpler. Many spread strategies, particularly the ones in this post involve getting out of positions before expiration, but if I included what happens before expiration this post will be 10x as long. Just be aware that you probably do NOT want to hold these positions to expiration, but you will have to figure that part out for yourself. Also, I am not advocating any plays described here, including my own.
This is going to be a lot more technical than my last post (while still avoiding scary things like Greeks that you should seriously learn from a book or something idk), but today we are going to be talking about my two personal favorite strategies: poor man's covered call and iron condor. Why are they my favorites? Like the basic vertical spreads from my last post, they are easy to comprehend and extremely flexible, but they can actually benefit from theta rather than simply reducing your exposure to it (vertical spreads can too, but it's much more difficult to do with basic vertical spreads in a way that has a reasonable risk/reward).
The poor man's covered call is really just a variation of a vertical spread where you buy one option and sell a higher strike. The difference is that the option you buy should be in the money and long-dated, and the option you sell should be out of the money and much shorter-dated. The idea is that this strategy mimics a covered call in that you are essentially buying 100 shares and then selling a call to reduce your cost basis, BUT your cost basis is already significantly reduced by simply buying a call instead of 100 shares. I will use an example from an option I actually purchased, so you can see the benefit:
On July 20 at 12:20 PM I purchased a Jan 2022 LVGO 80c for 50.40 a share. The price of the stock at the time was 111, so my options had 31 of instrinsic value and 19.40 of extrinsic value. (It cost me $5040, but buying the same amount of stock would have cost me $11100.) To offset the cost even further, I sold an Aug 2020 150c for 3.6 a share. In doing so, I reduced my cost basis by ~8% (from 50.4 to 46.8) by capping my max gain at 23.2 a share (the difference between the strikes is 70, my new cost basis is 46.8) IF LVGO goes up 50% in the next month. Note that if I were doing a real covered call with actual stock like some kind of boomer, I would have reduced my cost basis from 111 to 106.4, which is only a ~4% reduction instead of ~8%). The plan is that every month, I will sell a similarly far OTM call for the following month, getting 2.00 - 4.00 each time. Theoretically, if the stock never moves, or if the stock slowly creeps upward, I have significantly lowered my cost basis while also gaining value on the long call from the underlying stock moving up. Theta is going to eat the month-out call a LOT faster than the long-dated call, so this is situation in which you actually have theta on your side for once!
The big downside of this strategy is that if the underlying stock tanks (which is very possible, particularly with stocks with high enough IV to have premiums that make this strategy worthwhile) then obviously you lose a lot more intrinsic value on your long call than you gain on your short call (this is also true of a basic covered call, but stock doesn't expire). If this happens, you have a couple options. So you can see my thought process, here is an example of what I did today when LVGO dropped from 110 to 100:
Sell the September 150c for 3.50. Buy the August 170c for .8 as a hedge so I don't have any naked shorts. This reduces my cost basis another [3.5 - .8 = 2.7].
Now I am short the August 150c and the September 150c, and long the August 170c and the Jan 2022 80c. My reasoning here is, my cost basis is another 2.7 lower for the month of September, and I got roughly the same premium for September that I got for August when the stock was 110 rather than 100. Let's look at my gains/losses with some various scenarios.
There's more to say on this, but that seems like enough for now. The takeaway here is: have a strategy for anything the stock can do, and be ready to adapt it.
Iron condors: an iron condor is just two spreads stuck together. What's cool about them is that they are really just a fancy way of playing volatility. Buying an iron condor is essentially saying "I think the market is underpricing the volatility of this stock." Selling an iron condor is saying "I think the market is overpricing the volality of this stock." When you are wrong with a condor you can just tell yourself the market always wins in end the end because they have all the fancy computers and algorithms and who can beat that, and when you are right with a condor you feel like a god because you outsmarted all the market makers, those fucks.
ANYWAY, buying an iron condor means that you buy a call spread above the current price of the stock, and you buy a put spread below the current price of the stock, essentially betting it will either go up past your highest strike or down past your lowest strike. Selling an iron condor is the opposite, you are betting that the stock will NOT go up or down past your strikes. Here's an example with everyone's favorite thing: NUMBERS.
QQQ is currently sitting at 255. My crystal ball says that next week is going to be wacky, so I expect it will either go up or down let's say 3 percent, but not stay where it is.
For the call spread, buying a 260 call and selling a 263 call will cost me .94, for a max profit of 2.06 if it closes next Friday at 263 or above, and a full loss if it closes below 260. I could take that position by itself if I'm bullish on QQQ, and it's essentially a 2:1 bet that QQQ goes past 263 in the next week (breakeven at 260.94, 1:1 profit at 261.88, 2:1 profit at 262.82, do the math yourself to figure out why that is).
The put spread is almost identical. We can look at buying the 250 put, and selling the 247 put, and, interestingly we get, a cost of .8 (vs the .94 for the call spread, so the market is pricing the likelihood of QQQ going down by 8 at less than it going up by 8.)
Now we put those two spreads together. We buy the entire thing at once, and the cost is now the .8 for the put spread plus the .94 for the call spread = 1.74. Your max gain is now 1.26 if it goes EITHER below 247 OR above 263.
But wait a second you say, that deal sounds like it sucks! Why would I bet $174 to make $126? And I would say, why yes, I agree, that DOES sound like it sucks! So what if instead of doing that, we SELL the iron condor instead? That means we do exactly the opposite thing; instead of buying the 250p and 260c and selling the 247p and 260c, we sell the 250p and 260c, and buy the 247p and 263c. Now we have exactly the opposite risk profile; if QQQ stays between 250 and 260 by next Friday, we make $174, and if goes below 263 or 247, we lose $126 instead.
The interesting thing is that if we buy this iron condor, we are essentially making the bet that it's more likely QQQ moves 3% than the market thinks it is. If we sell this iron condor, we are essentially making the bet that it's less likely QQQ moves 3% than the market thinks it is. So either way, if you are right, hey, you did it, you beat the market!
Since spreads are infinitely variable, and condors are two spreads put together, they're DOUBLE INFINITY variable. You can mess with the risk profile by changing the expirations, changing the strikes, widening the spreads, widening or shrinking the length between the spreads, all sorts of shit. I recommend messing around with a bunch of different condors and seeing how each one has a different risk/reward profile.
There are two main downsides to condors not already mentioned. The first is commissions. Every condor consists of buying and selling 2 options to open the position, and then potentially buying and selling another 2-4 options to close the position (if you're not letting some/all expire worthless). Depending on your commission structure, this can eat up your gains fast. The second is that since you are buying and selling two spreads, you can really get hosed by the bid/ask spread, especially on stocks with lower liquidity. This isn't so much an issue if you're doing condors on SPY or QQQ, but if you really want to bet on an obscure low-volume stock, it's something to watch out for. If you thought you were getting the aforementioned spread for 1.26 but it doesn't fill at 1.35, you need to consider that your risk profile has changed a lot and you may want to rethink placing the trade at all.
Note: Iron condors are by far the least likely of the strategies I've mentioend to be fully held until expiration. The most important question for them is when you should continue to hold it, and when you should get out of it early, and when you should get out of only one spread and not the other. You should have a strategy when you open it for what you will do if the trade is going against you or you are guaranteed to lose money from panic selling. Perhaps that will be a topic for part 3.
Again this got way longer than I expected so I'm going to shut up now.
submitted by masterlich to wallstreetbets [link] [comments]

On Spells and Society, or how 5e spells completely change everyone's lives.

Today i have a confession to make: i'm a little bit of a minmaxer. And honestly, i think that's a pretty desirable trait in a DM. The minmaxer knows the rules, and exploits them to maximum efficiency.
"But wait, what does that have to do with spell use in society?" - someone, probably.
Well, the thing is that humans are absolutely all about minmaxing. There's a rule in the universe that reads "gas expands when hot", and suddenly we have steam engines (or something like that, i'm a political scientist not an engineer). A rule says 1+1 = 2, and suddenly we have calculus, computers and all kinds of digital stuff that runs on math. Sound is energy? Let's convert that shit into electricity, run it through a wire and turn it back into sound on the other side.
Bruh. Science is just minmaxing the laws of nature. Humanity in real life is just a big bunch of munchkins, and it should be no different in your setting.
And that is why minmaxing magic usage is something societies as a whole would do, specially with some notable spells. Today i will go in depth on how and why each of these notable mentions has a huge impact on a fantasy society.
We'll go from lowest level to highest, keeping in mind that the lower level a spell the more common it should be to find someone who has it, so often a level 2-3 spell will have more impact than a level 9 spell.

Mending (cantrip).
Repair anything in one minute. Your axe lost its edge? Tore your shirt? Just have someone Mend it.
Someone out there is crying "but wait! Not every village has a wizard!" and while that is true, keep in mind any High Elf knows a cantrip, as can any Variant Human.
A single "mender" could replace a lot of the work a smith, woodworker or seamstress does, freeing their time to only work on making new things rather than repair old ones.

Prestidigitation (cantrip).
Clean anything in six seconds. Committed axe murders until the axe got blunt, and now there's blood everywhere? Dog shit on your pillow out of spite? Someone walked all over the living room with muddy boots? Just Prestidigitate it away.
This may look like a small thing, but its actually huge when you apply it to laundry. Before washing machines were a thing housewives had to spend several hours a week washing them manually, and with Prestidigitation you can just hire someone to get it done in a few minutes.
A single "magic cleaner" can attend to several dozen homes, if not hundreds, thus freeing several hours of the time of dozens of women.
Fun fact: there's an interesting theory that says feminism only existed because of laundry machines and similar devices. Women found themselves having more free time, which they used to read and socialize. Educated women with more contacts made for easy organization of political movements, and the fact men were now able to do "the women's work" by pushing a button meant men were less opposed to losing their housewives' labor. Having specialized menders and magic cleaners could cause a comparable revolution in a fantasy setting, and help explain why women have a similar standing to men even in combat occupations such as adventuring.

Healing in general (1st-2nd level).
This one is fairly obvious. A commoner has 4 hit points, that means just about any spell is a full heal to the average person. That means most cuts, stab wounds, etc. can be solved by the resident cleric. Even broken bones that would leave you in bed for months can be solved in a matter of seconds as soon as the holy man arrives.
But that's nothing compared to the ability to cure diseases. While the only spell that can cure diseases is Lesser Restoration, which is second level, a paladin can do it much more easily with just a Lay on Hands. This means if one or two people catch a disease it can just be eradicated with a touch.
However doing that comes with a cost. If everyone is instantly expunged of illness, the populace does not build up their immune systems. Regular disease becomes less common, sure, but whenever it is reintroduced (by, say, immigrants or contact with less civilized humanoids) it can spread like wildfire, afflicting people so fast that no amount of healers will have the magic juice to deal with it.
Diseases become rare, plagues become common.

Continual Flame (2nd).
Ok, this one is a topic i love and could easily be its own post.
There's an article called "Why the Falling Cost of Light Matters", which goes in detail about how man went from chopping wood for fire, to using animal fat for candles, then other oils, whale oil, kerosene, then finally incandescent light bulbs, and more recently LED lights. Each of these leaps is orders of grandeur more efficient than the previous one, to the point that the cost of light today is about 500,000 times cheaper than it was for for a caveman. And until the early 1900s the only way mankind knew of making light was to set things on fire.
Continual Flame on the other hand allows you to turn 50gp worth of rubies and a 2nd level spell slot into a torch that burns forever. In a society that spends 60 hours of labor to be able to generate 140 minutes of light, this is a huge game changer.
This single spell, which i am 99% sure was just created as an excuse for why the dungeon is lit despite going for centuries without maintenance, allows you to have things like public lighting. Even if you only add a new "torchpost" every other week or month sooner or later you'll be left with a neatly lit city, specially if the city has had thousands of years in which to gather the rubies and light them up.
And because the demand of rubies becomes so important, consider how governments would react. Lighting the streets is a public service, if its strategically relevant to make the city safer at night, would that not warrant some restrictions on ruby sales? Perhaps even banning the use of rubies in jewelry?
Trivia: John D. Rockefeller, the richest man in history, gained his wealth selling kerosene. Kerosene at the time was used to light lamps. Gasoline was invented much later, when Rockefeller tasked a bunch of scientists to come up with a use for some byproducts of the kerosene production. This illustrates how much money is to be had in the lighting industry, and you could even have your own Rockefeller ruby baron in your game. I shall call him... Dohn J. Stonebreaker. Perfect name for a mining entrepreneur.
Whether the ruby trade ends up a monopoly under the direct supervision of the king or a free market, do keep in mind that Continual Flame is by far the most efficient way of creating light.

Gentle Repose (2nd).
Cast it on a corpse, and it stays preserved for 10 days.
This has many potential uses, from preserving foodstuffs (hey, some rare meats are expensive enough to warrant it) to keeping the bodies of old rulers preserved. Even if a ruler died of old age and cannot be resurrected, the body could be kept "fresh" out of respect/ceremony. Besides, it keeps the corpse from becoming undead.

Skywrite (2nd).
Ok, this one is mostly a gag. While the spell can be used by officials to make official announcements to the populace, such as new laws or important news, i like to just use it for spam. I mean, its a ritual spell that writes a message on the sky; what else would people use it for?
Imagine you show up in a city, and there's half a dozen clouds reading "buy at X, we have what you need", "get your farming supplies over at Joe's store" or "vote Y for the city council".
The possibilities are endless, and there's no way the players can expect it. Just keep in mind that by RAW the spell can only do words, meaning no images. No Patrick, "8===D" is not a word.

Zone of Truth (2nd).
This one is too obvious. Put all suspects of a crime into a ZoT, wait a couple minutes to make sure they fail the save, then ask each one if he did it. Sure its not a perfect system, things like the Ring of Mind Shielding still exist, but it's got a better chance of getting the right guy than most medieval justice systems. And probably more than a few contemporary ones. All while taking only a fraction of the time.
More importantly, with all the average crimes being handled instantly, the guards and investigators have more time to properly investigate the more unusual crimes that might actually involve a Thought Shield, Ring of Mind Shielding or a level 17 Mastermind.
There is a human rights argument against messing with people's minds in any way, which is why this may not be practiced in every kingdom. But there are definitely some more lawful societies that would use ZoT on just about every crime.
Why swear to speak the truth and nothing but the truth when you can just stand in a zone of truth?
Another interesting use for ZoT is oaths. When someone is appointed into an office, gets to a high rank in the military or a guild, just put them in a ZoT while they make their oath to stand for the organization's values and yadda yadda. Of course they can be corrupted later on, but at least you make sure they're honest when they are sworn in.

Sending (3rd).
Sending is busted in so many ways.
The more "vanilla" use of it is to just communicate over long distances. We all know that information is important, and that sometimes getting information a whole day ahead can lead to a 40% return on a massive two-year investment. Being able to know of invasions, monsters, disasters, etc. without waiting days or weeks for a courier can be vital for the survival of a nation. Another notable example is that one dude who ran super fast for a while to be the first to tell his side of a recent event.
But the real broken thing here is... Sending can Send to any creature, on any plane; the only restriction being "with which you are familiar". In D&D dead people just get sent to one of the afterlife planes, meaning that talking to your dead grandfather would be as simple as Sending to him. Settling inheritance disputes was never easier!
Before moving on to the next point let me ask you something: Is a cleric familiar with his god? Is a warlock familiar with his patron?

Speak With Dead (3rd).
Much like Sending, this lets you easily settle disputes. Is the senate/council arguing over a controversial topic? Just ask the beloved hero or ruler from 200 years ago what he thinks on the subject. As long his skeleton still has a jaw (or if he has been kept in Gentle Repose), he can answer.
This can also be used to ask people who killed them, except murderers also know this. Plan on killing someone? Accidentally killed someone? Make sure to inutilize the jaw. Its either that, being so stealthy the victim can't identify you, or being caught.

Note on spell availability.
Oh boy. No world-altering 4th level spells for some reason, and suddenly we're playing with the big boys now.
Spells up to 3rd level are what I'd consider "somewhat accessible", and can be arranged for a fee even for regular citizens. For instance the vanilla Priest statblock (MM348) is a 5th level cleric, and the standard vanilla Druid (MM346) a 4th level druid.
Spells of 5th level onward will be considered something only the top 1% is able to afford, or large organizations such as guilds, temples or government.

Dream (5th).
I was originally going to put Dream along with Sending and Telepathy as "long range communication", but decided against it due to each of them having unique uses.
And when it comes to Dream, it has the unique ability of allowing you to put your 8 hours of sleep to good use. A tutor could hire someone to cast Dream on him, thus allowing him to teach his student for 8 hours at any distance. This is a way you could even access hermits that live in the middle of nowhere or in secluded monasteries. Very wealthy families or rulers would be willing to pay a good amount of money to make sure their heirs get that extra bit of education.
Its like online classes, but while you sleep!
Another interesting use is for cheating. Know a princess or queen you like? She likes you back? Her dad put 400 trained soldiers between you? No problemo! Just find a 9th level Bard, Warlock or Wizard, but who am i kidding, of course it'll be a bard. And that bard is probably you. Now you have 8 hours to do whatever you want, and no physical evidence will be left.

Raise Dead (5th).
Few things matter more in life than death. And the ability to resurrect people has a huge impact on society. The impact is so huge that this topic needs topics of its own.
First, diamond monopoly. Remember what i said about how Continual Flame would lead to controlled ruby sales due to its strategic value? This is the same principle, but a hundred times stronger. Resurrection is a huge strategic resource. It makes assassinations harder, can be used to bring back your officials or highest level soldiers over and over during a war, etc. This means more authoritarian regimes would do everything within their power to control the supply and stock of diamonds. Which in turn means if anyone wants to have someone resurrected, even in times of peace, they'll need to call in a favor, do a quest, grease some hands...
Second, resurrection insurance. People hate risks. That's why insurance is such a huge industry, taking up about 15% of the US GDP. People insure their cars, houses... even their lives. Resurrection just means "life insurance" is taken more literally. This makes even more sense when you consider how expensive resurrection is: nobody can afford it in one go, but if you pay a little every month or year you can save up enough to have it done when the need arises.
This is generally incompatible with the idea of a State-run monopoly over diamonds, but that just means different countries within a setting can take different approaches.
To make things easier, i even used some microeconomics to make a sheet in my personal random generators to calculate the price of such a service. Just head to the "Insurance" tab and fill in the information relative to your setting.
With actual life insurance resurrection can cost as little as 5gp a year for humans or 8sp a year for elves, making resurrection way more affordable than it looks.
Also, do you know why pirates wore a single gold earring? It was so that if your body washes up on the shore whoever finds it can use the money to arrange a proper burial. Sure there's a risk of the finder taking it and walking away, but the pirates did it anyway. With resurrection in play, might as well just wear a diamond earring instead and hope the finder is nice enough to bring you back.
I got so carried away with the whole insurance thing i almost forgot: the possibility of resurrection also changes how murders are committed.
If you want someone dead but resurrection exists, you have to remove the vital organs. Decapitation would be far more common. Sure resurrection is still possible, but it requires higher level spells or Reincarnate, which has... quirks.
As a result it should be very obvious when someone was killed by accident or an overreaction, and when someone was specifically out to kill the victim.

Scrying (5th).
This one is somewhat obvious, in that everyone and their mother knows it helps finding people. But who needs finding? Well, that would be those who are hiding.
The main use i see for this spell, by far, is locating escaped criminals. Just collect a sample of hair or blood when arresting someone (or shipping them to hard labor which is way smarter), and if they escape you'll be almost guaranteed to successfully scry on them.
A similar concept to this is seen in the Dragon Age series. If you're a mage the paladins keep a sample of your blood in something called a phylactery, and that can be used to track you down. There's even a quest or two about mages trying to destroy their phylacteries before escaping.
Similarly, if you plan a jailbreak it would be highly beneficial to destroy the blood/hair sample first. As a matter of fact i can even see a thieves guild hiring a low level party to take out the sample while the professional infiltrators get the prisoner out. Keep in mind both events must be done at the same time, otherwise the guards will just collect a new sample or would have already taken it to the wizard.
But guards aren't the only ones with resources. A loan shark could keep blood samples of his debtors, a mobster can keep one of those who owe him favors, etc. And the blood is ceremoniously returned only when the debt is fully paid.

Teleportation Circle (5th), Transport Via Plants (6th).
In other words, long range teleportation. This is such a huge thing that it is hard to properly explain how important it is.
Teleportation Circle creates a 10ft. circle, and everyone has one round to get in and appear on the target location. Assuming 30ft. movement that means you can get 192 people through, which is a lot of potential merchants going across any distance. Or 672 people dashing.
Math note: A 30ft radius square around a 10ft. diameter square, minus the 4 original squares. Or [(6*2+2)^2]-4 squares of 5ft. each. Hence 192 people.
Getting hundreds of merchants, workers, soldiers, etc. across any distance is nothing to scoff at. In fact, it could help explain why PHB item prices are so standardized: Arbitrage is so easy and cheap that price differences across multiple markets become negligible. Unless of course countries start setting up tax collectors outside of the permanent teleportation circles in order to charge tariffs.
Transport Via Plants does something very similar but it requires 5ft of movement to go through, which means less people can be teleported. On the other hand it doesn't burn 50gp and can take you to any tree the druid is familiar with, making it nearly impossible for tax collectors to be waiting on the other side. Unfortunately druids tend to be a lot less willing to aid smugglers, so your best bet might be a bard using spells that don't belong to his list.
With these methods of long range teleportation not only does trade get easier, but it also becomes possible to colonize or inhabit far away places. For instance if someone finds a gold mine in the antarctic you could set up a mine and bring food and other supplies via teleportation.

Major Image (6th level slot).
Major Image is a 3rd level spell that creates an illusion over a 20ft cube, complete with image, sound, smell and temperature. When cast with a 6th level slot or higher, it lasts indefinitely.
That my friends, is a huge spell. Why get the world's best painter to decorate the ceiling of your cathedral when you can just get an illusion made in six seconds?
The uses for decorating large buildings is already good, but remember: we're not restricted to sight.
Cast this on a room and it'll always be cool and smell nice. Inns would love that, as would anyone who always sleeps or works in the same room. Desert cities have never been so chill.
You can even use an illusion to make the front of your shop seem flashier, while hollering on loop to bring customers in.
The only limit to this spell is your imagination, though I'm pretty sure it was originally made just to hide secret passages.
Trivia: the ki-rin (VGM163) can cast Major Image as a 6th level spell, at will. It's probably meant to give them fabulous lairs yet all it takes is someone doing the holy horsey a big favor, and it could enchant the whole city in a few hours. Shiniest city on the planet, always at a nice temperature and with a fragrance of lilac, gooseberries or whatever you want.

Simulacrum (7th).
Spend 12 hours and 1500gp worth of ruby dust, and get a clone of yourself. Notably, each caster can only have one simulacrum, regardless of who the person he cloned is.
How this changes the world? By allowing the rich and powerful to be in two places at once. Kings now have a perfect impersonator who thinks just like them. A wealthy banker can run two branches of his company. Etc.
This makes life much easier, but also competes with Continual Flame over resources.
It also gives "go fuck yourself" a whole new meaning, making the sentence a valid Suggestion.

Clone (8th).
If there's one spell i despise, its Clone.
Wizard-only preemptive resurrection. Touch spell, costs 1.000gp worth of diamonds each time, takes 120 days to come into effect, and creates a copy of the creature that the soul occupies if the original dies. Oh, and the copy can be made younger.
Why is it so despicable? Because it makes people effectively immortal. Accidents and assassinations just get you sent to the clone, and old age can be forever delayed because you keep going back to younger versions of yourself. Being a touch spell means the wizard can cast it on anyone he wants.
In other words: high level wizards, and only wizards, get to make anyone immortal.
That means wizards will inevitably rule any world in which this spell exists.
Think about it. Rulers want to live forever. Wizards can make you live forever. Wizards want other stuff, which you must give them if you want to continue being Cloned. Rulers who refuse this deal eventually die, rulers who accept stick around forever. Natural selection makes it so that eventually the only rulers left are those who sold their soul to wizards. Figuratively, i hope.
The fact that there are only a handful of wizards out there who are high enough level to cast the spell means its easier for them organize and/or form a cartel or union (cartels/unions are easier to maintain the fewer suppliers are involved).
This leads to a dystopian scenario where mages rule, kings are authoritarian pawns and nobody else has a say in anything. Honestly it would make for a fun campaign in and of itself, but unless that's specifically what you're going for it'll just derail everything else.
Oh, and Clone also means any and all liches are absolute idiots. Liches are people who turned themselves into undead abominations in order to gain eternal life at the cost of having to feed on souls. They're all able to cast 9th level wizard spells, so why not just cast an 8th level one and keep undeath away? Saves you the trouble of going after souls, and you keep the ability to enjoy food or a day in the sun.

Demiplane (8th).
Your own 30ft. room of nothingness. Perfect place for storage and a DM's nightmare given how once players have access to it they'll just start looting furniture and such. Oh the horror.
But alas, infinite storage is not the reason this is a broken spell. No sir.
Remember: you can access someone else's demiplane. That means a caster in city 1 can put things into a demiplane, and a caster in city 2 can pull them out of any surface.
But wait, there's more! There's nothing anywhere saying you can't have two doors to the same demiplane open at once. Now you're effectively opening a portal between two places, which stays open for a whole hour.
But wait, there's even more! Anyone from any plane can open a door to your neat little demiplane. Now we can get multiple casters from multiple planes connecting all of those places, for one hour. Sure this is a very expensive thing to do since you're having to coordinate multiple high level individuals in different planes, but the payoff is just as high. We're talking about potential integration between the most varied markets imaginable, few things in the multiverse are more valuable or profitable. Its a do-it-yourself Sigil.
One little plot hook i like about demiplanes is abandoned/inactive ones. Old wizard/warlock died, and nobody knows how to access his demiplanes. Because he's at least level 15 you just know there's some good stuff in there, but nobody can get to it. Now the players have to find a journal, diary, stored memory or any other way of knowing enough about the demiplane to access it.

True Polymorph (9th).
True Polymorph. The spell that can turn any race into any other race, or object. And vice-versa. You can go full fairy godmother and turn mice into horses. For a spell that can change anything about one's body it would not be an unusual ruling to say it can change one's sex. At the very least it can turn a man into a chair, and the chair into a woman (or vice-versa of course).
But honestly, that's just the tip of the True Polymorph iceberg. Just read this more carefully:
> You transform the creature into a different creature, the creature into a nonmagical object, or the object into a creature
This means you can turn a rock or twig into a human. A fully functional human with, as far as the rules go, a soul. You can create life.
But wait, there's more! Nothing there says you have to turn the target into a known creature on an existing creature. The narcissist bard wants to create a whole race of people who look like him? True Polymorph. A player wants to play a weird ass homebrew race and you have no idea how it would fit into the setting? True Polymorph. Wizard needs a way to quickly populate a kingdom and doesn't want to wait decades for the subjects to grow up? True Polymorph. Warlock must provide his patron 100 souls in order to free his own? True Polymorph. The sorcerer wants to do something cool? Fuck that guy, sorcerers don't get any of the fun high level spells; True Poly is available to literally every arcane caster but the sorcerer.
Note: what good is Twinned Spell if all the high level twinnable spells have been specifically made unavailable to sorcerers?
Do keep in mind however that this brings a whole new discussion on human rights. Does a table have rights? Does it have rights after being turned into a living thing? If it had an owner, is it now a slave? Your country will need so many new laws, just to deal with this one spell.
People often say that high level wizards are deities for all intents and purposes. This is the utmost proof of that. Clerics don't get to create life out of thin air, wizards do. The cleric worships a deity, the wizard is the deity.

Conclusion.
Intelligent creatures not only can game the system, but it is entirely in character for them to do so. I'll even argue that if humanoids don't use magic to improve their lives when it's available, you're pushing the suspension of disbelief.
With this post i hope to have helped you make more complex and realistic societies, as well as provide a few interesting and unusual plot hooks
Lastly, as much as i hate comment begging i must admit i am eager to see what spells other players think can completely change the world. Because at the end of the day we all know that extra d6 damage is not what causes empires to rise and fall, its the utility spells that make the best stories.

Edit: Added spell level to all spells, and would like to thank u/kaul_field for helping with finishing touches and being overall a great mod.
submitted by Isphus to DnDBehindTheScreen [link] [comments]

How to not get ruined with Options - Part 3a of 4 - Simple Strategies

Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM
Post 2: Basics: Buying and Selling, the Greeks
Post 3a: Simple Strategies
Post 3b: Advanced Strategies
Post 4a: Example of trades (short puts, covered calls, and verticals)
Post 4b: Example of trades (calendars and hedges)
---
Ok. So I lied. This post was getting way too long, so I had to split in two (3a and 3b)
In the previous posts 1 and 2, I explained how to buy and sell options, and how their price is calculated and evolves over time depending on the share price, volatility, and days to expiration.
In this post 3a (and the next 3b), I am going to explain in more detail how and when you can use multiple contracts together to create more profitable trades in various market conditions.
Just a reminder of the building blocks:
You expect that, by expiration, the stock price will …
... go up more than the premium you paid → Buy a call
… go down more than the premium you paid → Buy a put
... not go up more than the premium you got paid → Sell a call
... not go down more than the premium you got paid → Sell a put
Buying Straight Calls:
But why would you buy calls to begin with? Why not just buy the underlying shares? Conversely, why would you buy puts? Why not just short the underlying shares?
Let’s take long shares and long calls as an example, but this applies with puts as well.
If you were to buy 100 shares of the company ABC currently trading at $20. You would have to spend $2000. Now imagine that the share price goes up to $25, you would now have $2500 worth of shares. Or a 25% profit.
If you were convinced that the price would go up, you could instead buy call options ATM or OTM. For example, an ATM call with a strike of $20 might be worth $2 per share, so $200 per contract. You buy 10 contracts for $2000, so the same cost as buying 100 shares. Except that this time, if the share price hits $25 at expiration, each contract is now worth $500, and you now have $5000, for a $3000 gain, or a 150% profit. You could even have bought an OTM call with a strike of $22.50 for a lower premium and an even higher profit.
But it is fairly obvious that this method of buying calls is a good way to lose money quickly. When you own shares, the price goes up and down, but as long as the company does not get bankrupt or never recovers, you will always have your shares. Sometimes you just have to be very patient for the shares to come back (buying an index ETF increases your chances there). But by buying $2000 worth of calls, if you are wrong on the direction, the amplitude, or the time, those options become worthless, and it’s a 100% loss, which rarely happens when you buy shares.
Now, you could buy only one contract for $200. Except for the premium that you paid, you would have a similar profit curve as buying the shares outright. You have the advantage though that if the stock price dropped to $15, instead of losing $500 by owning the shares, you would only lose the $200 you paid for the premium. However, if you lose these $200 the first month, what about the next month? Are you going to bet $200 again, and again… You can see that buying calls outright is not scalable long term. You need a very strong conviction over a specific period of time.
How to buy cheaper shares? Sell Cash Covered Put.
Let’s continue on the example above with the company ABC trading at $20. You may think that it is a bit expensive, and you consider that $18 is a more acceptable price for you to own that company.
You could sell a put ATM with a $20 strike, for $2. Your break-even point would be $18, i.e. you would start losing money if the share price dropped below $18. But also remember that if you did buy the shares outright, you would have lost more money in case of a price drop, because you did not get a premium to offset that loss. If the price stays above $20, your return for the month will be 11% ($200 / $1800).
Note that in this example, we picked the ATM strike of $20, but you could have picked a lower strike for your short put, like an OTM strike of $17.50. Sure, the premium would be lower, maybe $1 per share, but your break-even point would drop from $18 to $16.50 (only 6% return then per month, not too shabby).
The option trade will usually be written like this:
SELL -1 ABC 100 17 JUL 20 17.5 PUT @ 1.00
This means we sold 1 PUT on ABC, 100 shares per contract, the expiration date is July 17, 2020, and the strike is $17.5, and we sold it for $1 per share (so $100 credit minus fees).
With your $20 short put, you will get assigned the shares if the price drops below $20 and you keep it until expiration, however, you will have paid them the equivalent of $18 each (we’ll actually talk more about the assignment later). If your short put expires worthless, you keep the premium, and you may decide to redo the same trade again. The share price may have gone up so much that the new ATM strike does not make you comfortable, and that’s fine as you were not willing to spend more than $18 per share, to begin with, anyway. You will have to wait for some better conditions.
This strategy is called a cash covered put. In a taxable account, depending on your broker, you can have it on margin with no cash needed (you will need to have some other positions to provide the buying power). Beware that if you don’t have the cash to cover the shares, it is adding some leverage to your overall position. Make sure you account for all your potential risks at all times. The nice thing about this position is that as long as you are not assigned, you don’t actually need to borrow some money, it won’t cost you anything. In an IRA account, you will need to have the cash available for the assignment (remember in this example, you only need $1800, plus trading fees).
Let’s roll!
Now one month later, the share price is between $18 and $22, there are few days of expiration left, and you don’t want to be assigned, but you want to continue the same process for next month. You could close the current position, and reopen a new short put, or you could in one single transaction buy back your current short put, and sell another put for next month. Doing one trade instead of two is usually cheaper because you reduce the slippage cost. The closing of the old position and re-opening of a new short position for the next expiration is called rolling the short option (from month to month, but you can also do this with weekly options).
The croll can be done a week or even a few days before expiration. Remember to avoid expiration days, and be careful being short an option on ex-dividend dates. When you roll month to month with the same strike, for most cases, you will get some money out of it. However, the farther your strike is from the current share price, the less additional premium you will get (due to the lower extrinsic value on the new option), and it can end up being close to $0. At that point, given the risk incurred, you may prefer to close the trade altogether or just be assigned. During the roll, depending on if the share price moved a bit, you can adjust the roll up or down. For example, you buy back your short put at $18, and you sell a new short put at $17 or $19, or whatever value makes the most sense.
Assignment
Now, let’s say that the share price finally dropped below $20, and you decided not to roll, or it dropped so much that the roll would not make sense. You ended up getting your shares assigned at a strike price of $18 per share. Note that the assigned share may have a current price much lower than $18 though. If that’s the case, remember that you earned more money than if you bought the shares outright at $20 (at least, you got to keep the $2 premium). And if you rolled multiple times, every premium that you got is additional money in your account.
Want to sell at a premium? Sell Covered Calls.
You could decide to hold onto the shares that you got at a discount, or you may decide that the stock price is going to go sideways, and you are fine collecting more theta. For example, you could sell a call at a strike of $20, for example for $1 (as it is OTM now given the stock price dropped).
SELL -1 ABC 100 17 JUL 20 20 CALL @ 1.00
When close to the expiration time, you can either roll your calls again, the same way that you rolled your puts, as much as you can, or just get assigned if the share price went up. As you get assigned, your shares are called away, and you receive $2000 from the 100 shares at $20 each. Except that you accumulated more money due to all the premiums you got along the way.
This sequence of the short put, roll, roll, roll, assignment, the short call, roll, roll, roll, is called the wheel.
It is a great strategy to use when the market is trading sideways and volatility is high (like currently). It is a low-risk trade provided that the share you pick is not a risky one (pick a market ETF to start) perfect to get create some income with options. There are two drawbacks though:
You will have to be patient for the share to go back up, but often you can end up with many shares at a loss if the market has been tanking. As a rule of thumb, if I get assigned, I never ever sell a call below my assignment strike minus the premium. In case the market jumps back up, I can get back to my original position, with an additional premium on the way. Market and shares can drop like a stone and bounce back up very quickly (you remember this March and April?), and you really don’t want to lock a loss.
Here is a very quick example of something to not do: Assigned at $18, current price is $15, sell a call at $16 for $1, share goes back up to $22. I get assigned at $16. In summary, I bought a share at $18, and sold it at $17 ($16 + $1 premium), I lost $1 between the two assignments. That’s bad.
You will have to find some other companies to do the wheel on. If it softens the blow a bit, your retirement account may be purely long, so you’ll not have totally missed the upside anyway.
A short put is a bullish position. A short call is a bearish position. Alternating between the two gives you a strategy looking for a reversion to the mean. Both of these positions are positive theta, and negative vega (see part 2).
Now that I explained the advantage of the long calls and puts, and how to use short calls and puts, we can explore a combination of both.
Verticals
Most option beginners are going to use long calls (or even puts). They are going to gain some money here and there, but for most parts, they will lose money. It is worse if they profited a bit at the beginning, they became confident, bet a bigger amount, and ended up losing a lot. They either buy too much (50% of my account on this call trade that can’t fail), too high of a volatility (got to buy those NKLA calls or puts), or too short / too long of an expiration (I don’t want to lose theta, or I overspent on theta).
As we discussed earlier, a straight long call or put is one of the worst positions to be in. You are significantly negative theta and positive vega. But if you take a step back, you will realize that not accounting for the premium, buying a call gives you the upside of stock up to the infinity (and buying a put gives you the upside of the stock going to $0). But in reality, you rarely are betting that the stock will go to infinity (or to $0). You are often just betting that the stock will go up (or down) by X%. Although the stock could go up (or down) by more than X%, you intuitively understand that there is a smaller chance for this to happen. Options are giving you leverage already, you don’t need to target even more gain.
More importantly, you probably should not pay for a profit/risk profile that you don’t think is going to happen.
Enter verticals. It is a combination of long and short calls (or puts). Say, the company ABC trades at $20, you want to take a bullish position, and the ATM call is $2. You probably would be happy if the stock reaches $25, and you don’t think that it will go much higher than that.
You can buy a $20 call for $2, and sell a $25 call for $0.65. You will get the upside from $20 to $25, and you let someone else take the $25 to infinity range (highly improbable). The cost is $1.35 per share ($2.00 - $0.65).
BUY +1 VERTICAL ABC 100 17 JUL 20 20/25 CALL @ 1.35
This position is interesting for multiple reasons. First, you still get the most probable range for profitability ($20 to $25). Your cost is $1.35 so 33% cheaper than the long call, and your max profit is $5 - $1.35 = $3.65. So your max gain is 270% of the risked amount, and this is for only a 25% increase in the stock price. This is really good already. You reduced your dependency on theta and vega, because the short side of the vertical is reducing your long side’s. You let someone else pay for it.
Another advantage is that it limits your max profit, and it is not a bad thing. Why is it a good thing? Because it is too easy to be greedy and always wanting and hoping for more profit. The share reached $25. What about $30? It reached $30, what about $35? Dang it dropped back to $20, I should have sold everything at the top, now my call expires worthless. But with a vertical, you know the max gain, and you paid a premium for an exact profit/risk profile. As soon as you enter the vertical, you could enter a close order at 90% of the max value (buy at $1.35, sell at $4.50), good till to cancel, and you hope that the trade will eventually be executed. It can only hit 100% profit at expiration, so you have to target a bit less to get out as soon as you can once you have a good enough profit. This way you lock your profit, and you have no risk anymore in case the market drops afterwards.
These verticals (also called spreads) can be bullish or bearish and constructed as debit (you pay some money) or credit (you get paid some money). The debit or credit versions are equivalent, the credit version has a bit of a higher chance to get assigned sooner, but as long as you check the extrinsic value, ex-dividend date, and are not too deep ITM you will be fine. I personally prefer getting paid some money, I like having a bigger balance and never have to pay for margin. :)
Here are the 4 trades for a $20 share price:
CALL BUY 20 ATM / SELL 25 OTM - Bullish spread - Debit
CALL BUY 25 OTM / SELL 20 ATM - Bearish spread - Credit
PUT BUY 20 ATM / SELL 25 ITM - Bullish spread - Credit
PUT BUY 25 ITM / SELL 20 ATM - Bearish spread - Debit
Because both bullish trades are equivalent, you will notice that they both have the same profit/risk profile (despite having different debit and credit prices due to the OTM/ITM differences). Same for the bearish trades. Remember that the cost of an ITM option is greater than ATM, which in turn is greater than an OTM. And that relationship is what makes a vertical a credit or a debit.
I understand that it can be a lot to take in. Let’s take a step back here. I picked a $20/$25 vertical, but with the share price at $20, I could have a similar $5 spread with $15/$20 (with the same 4 constructs). Or instead of 1 vertical $20/$25, I could have bought 5 verticals $20/$21. This is a $5 range as well, except that it has a higher probability for the share to be above $21. However, it also means that the spread will be more expensive (you’ll have to play with your broker tool to understand this better), and it also increases the trading fees and potentially overall slippage, as you have 5 times more contracts. Or you could even decide to pick OTM $25/$30, which would be even cheaper. In this case, you don’t need the share to reach $30 to get a lot of profit. The contracts will be much cheaper (for example, like $0.40 per share), and if the share price goes up to $25 quickly long before expiration, the vertical could be worth $1.00, and you would have 150% of profit without the share having to reach $30.
If you decide to trade these verticals the first few times, look a lot at the numbers before you trade to make sure you are not making a mistake. With a debit vertical, the most you can lose per contract is the premium you paid. With a credit vertical, the most you can lose is the difference between your strikes, minus the premium you received.
One last but important note about verticals:
If your short side is too deep ITM, you may be assigned. It happens. If you bought some vertical with a high strike value, for example:
SELL +20 VERTICAL SPY 100 17 JUL 20 350/351 PUT @ 0.95
Here, not accounting for trading fees and slippage, you paid $0.95 per share for 20 contracts that will be worth $1 per share if SPY is less than $350 by mid-July, which is pretty certain. That’s a 5% return in 4 weeks (in reality, the trading fees are going to reduce most of that). Your actual risk on this trade is $1900 (20 contracts * 100 shares * $0.95) plus trading fees. That’s a small trade, however the underlying instrument you are controlling is much more than that.
Let’s see this in more detail: You enter the trade with a $1900 potential max loss, and you get assigned on the short put side (strike of $350) after a few weeks. Someone paid expensive puts and exercised 20 puts with a strike of $350 on their existing SPY shares (2000 of them, 20 contracts * 100 shares). You will suddenly receive 2000 shares on your account, that you paid $350 each. Thus your balance is going to show -$700,000 (you have 2000 shares to balance that).
If that happens to you: DON’T PANIC. BREATHE. YOU ARE FINE.
You owe $700k to your broker, but you have roughly the same amount in shares anyway. You are STILL protected by your long $351 puts. If the share price goes up by $1, you gain $2000 from the shares, but your long $351 put will lose $2000. Nothing changed. If the share price goes down by $1, you lose $2000 from the shares, but your long $350 put will gain $2000. Nothing changed. Just close your position nicely by selling your shares first, and just after selling your puts. Some brokers can do that in one single trade (put based covered stock). Don’t let the panic set in. Remember that you are hedged. Don’t forget about the slippage, don’t let the market makers take advantage of your panic. Worst case scenario, if you use a quality broker with good customer service, call them, and they will close your position for you, especially if this happens in an IRA.
The reason I am insisting so much on this is because of last week’s event. Yes, the RH platform may have shown incorrect numbers for a while, but before you trade options you need to understand the various edge cases. Again if this happens to you, don’t panic, breathe, and please be safe.
This concludes my post 3a. We talked about the trade-offs between buying shares, buying calls instead, selling puts to get some premium to buy some shares at a cheaper price, rolling your short puts, getting your puts assigned, selling calls to get some additional money in sideways markets, rolling your short calls, having your calls assigned too. We talked about the wheel, being this whole sequence spanning multiple months. After that, we discussed the concept of verticals, with bullish and bearish spreads that can be either built as a debit or a credit.
And if there is one thing you need to learn from this, avoid buying straight calls or puts but use verticals instead, especially if the volatility is very high. And do not ever sell naked calls, again use verticals.
The next post will explain more advanced and interesting option strategies.
---
Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM
Post 2: Basics: Buying and Selling, the greeks
Post 3a: Simple Strategies
Post 3b: Advanced Strategies
Post 4a: Example of trades (short puts, covered calls, and verticals)
Post 4b: Example of trades (calendars and hedges)
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A Basic Introduction to Vertical Spreads - Stop Losing Money When You Predict the Correct Direction

Vertical Spread Basics
Spreads often get a bad rap for sounding more complex than they end up being. I’d wager quite a few people here don’t even know what the “Select” button is for at the top right of the options screen on Robinhood. I see over and over people losing their money with puts or calls when a vertical spread would have accomplished the same thing but better. To keep this basic I will stick to vertical spreads (both credit and debit) and a bit about Iron Condors, and once that’s done I’ll go into a bit of detail about when and where I use them.
A vertical option spread is purchasing two options; one you’re buying and one you’re selling. You’re literally trading based on the difference between the two option prices. For example, if I bought a SPY 300c 6/3 and sold a SPY 305c 6/3, I would have a SPY 6/3 305/300 Call Debit Spread. What do we accomplish by both buying and selling the right to 100 shares of SPY though? The short answer: This defines our risk. This can seem kind of difficult to comprehend, but it’s fairly simple: The value of the spread can never be more than the difference between the two strike prices.
For the above mentioned trade, we can currently purchase a SPY 6/3 305/300 Call Debit Spread for $0.65 per share ($0.65*100=$65), meaning that the difference in price between the 305c and the 300c is $0.65. If SPY finishes above $305 on 6/3, our 300c we bought finishes in the money as does the 305c we sold, which means the spread between the two option prices has reached its maximum of $5.00. We can now purchase 100 shares of SPY at $300 then sell them to the holder of the option we sold for $305, netting $5 per share for a neat $500. This means that we can make up to $500-$65 = $435 on the trade, a tidy 769% profit.
If you take anything away from this write up, please take this:
An easy way to view a SPY 6/3 305/300 Call Debit Spread is then that you’re betting $65 to win $500 as long as SPY ends above $305 on 6/3.
If you’re not starting to see why vertical spreads are more intuitive than single calls or puts then I encourage you to look back over the paragraph above. The Greeks still matter a lot, but the trade can easily be distilled to the above sentence which is not the case with a single option. I continually see people buying calls and puts, correctly predicting the direction of the market, and still losing money due to IV deterioration or the price not moving enough in the right direction. Vertical spreads simplify the trade by making it only as complicated as you want it to be. If you simply want to bet that a stock will go up over the next month, just set the strikes up to straddle the current price, for example, a SPY 290/280 Call Debit spread. Similarly if you wanted to be against the market, you would do the same thing but by buying a 290 put and selling a 280 put making a SPY 290/280 Put Spread.
A credit spread is very similar to a debit spread but inverted. To create a SPY 6/3 300/305 Call Credit spread, we would sell a 300c and buy a 305c, and because we’re selling the more valuable contract (the lower the strike price the more valuable the call), we get a net credit instead of a net debit, meaning we receive money in our account rather than pay it. That means just like when we short a stock, to close the position we need to pay money rather than receive it. With a call credit spread, we’re now betting against the market: If SPY stays below $300 on 6/3, the credit we received when we sold spread stays ours forever since both the 300c we sold and the 305c we bought expired worthless. You’re still betting on the spread between the two option prices, but now you’re betting on the differences between the two going to 0 rather than the maximum. Now, if the position moves against us and SPY finishes above $305 on 6/3, our SPY 300c we sold will exercise and we will pay for those 100 shares with our 100 shares we receive from our 305c, meaning that we pay at maximum $500. NOTE: Robinhood will hold the maximum you can lose as collateral just in case your trade goes poorly, so if you receive a credit of $65 on the trade, you’ll effectively have another $435 locked up until you close the trade.
Until now I have assumed that the underlying stock price will always finish outside of the range of your spread which has made things a little cleaner. In reality, if you should choose to hold until expiration and the underlying price is between the two strikes, one of your options will exercise and the other will expire worthless. For example, if on 6/3 SPY ended at $303, for our SPY 6/3 305/300 Debit Spread our 300c would exercise and we would have 100 shares of SPY purchased at $300, netting us $3 per share. Considering that most people in this sub could not handle a purchase of 100 shares of SPY at $300, Robinhood will exercise your spread an hour before close at market prices (which is why I will always sell before this point since you can do a lot better than market prices most of the time).
Basics Summary
Thus ends the basic portion of the write up. The benefits of vertical spreads are:
Options Profit Calculator is a very useful resource for learning not only vertical spreads but any options and I highly recommend playing around with it if you’re new to options: https://www.optionsprofitcalculator.com/
Details and Tips
Alright this got a bit long, and there's more to talk about, but I’ll stop here. DISCLAIMER: Now that you’ve read this post, I'll admit I’ve only been actively trading for about three months. I just finished a Finance undergrad and I've been investing unsuccessfully for five years until this point where I’m finally up about 100% from when I started over something silly like 100 trades. I’m not gonna post all of my past positions, but my current positions can be found here. Suffice to say that I made a ton off bearish spreads and it was a rude reeducation that made me learn it was necessary to play both sides of the market.
TL;DR: Spreads are easier to conceptualize, don’t worry as much about IV and theta, have defined risk, and require less capital than puts/calls. An easy way to view a SPY 6/3 305/300 Call Debit Spread is then that you’re betting $65 to win $500 as long as SPY ends above $305 on 6/3.
submitted by DropItShock to wallstreetbets [link] [comments]

Stop Buying Expensive Options On Obvious Plays: How IV Steals Your Tendies

I've seen these trades a few too many times, so I figured it's about time to explain why you should give a damn about 'ivy' and what it means for an option to be expensive. This is a lesson on efficient capital allocation.
Where do options come from?
There's no free lunch. The market is not perfectly efficient (it is certainly possible to make money), but it is pretty damn close. What this means is that 'obvious' plays are priced to limit your upside.
Why is this the case? Transactions are symmetric -- whenever you buy an option, someone is selling it to you. Depending on what you're buying, it's either another trader, or a market maker. When trading highly liquid options, it's usually a market maker (think Jane Street or Citadel), whereas if you're trading an unknown, small company, it's probably another trader (Jane Street is not going to bother with Lumber Liquidators). But, irrespective of who is selling it to you, they're in it to make a *profit.
IV
What does this mean? The money-making opportunity is usually priced into the option premium. A 4/9 220p on SPY currently has an IV of 83.44%. A 4/9 30p on RCL (roughly comparable percentage price decrease on the strike) has an IV of 319.70%! Do you think that Royal Caribbean is about to plummet because they have negative cashflow and don't qualify for the bailout? Yeah, well so does the market. It's written right there, in the IV. That's what IV is -- implied volatility, the expected volatility, according to the market. In order to make a huge return from trading the RCL put, RCL would need to drop even more than the market currently expects it to... With an IV of 319.70%, that doesn't seem particularly likely. So, should you buy RCL puts? Probably not... Unless you believe that you know something that the market does not, in which case, your claim would be that the RCL put, despite an IV of 319.70%, is still 'underpriced'. If you think that you have knowledge that justifies more IV than is currently priced in, then enter the trade.
Fundamentally, IV is forcing you to pay for the privilege of profiting from the volatility of the underlying. It has to be set up this way, because option sellers need to be sufficiently incentivised to take the risk of writing an option on something as 'risky' as RCL. Remember, your gain is their loss -- they're only going to enter the trade if you pay handsomely upfront.
Right now, everything has 'high' IV, Vix is through the roof. When Vix eventually drops, everything will be IV crushed. But options on individual stocks still have more/less IV priced in, as dependent on how much the market expects them to move. Picking the 'obvious' candidates with the highest IV is unlikely to result in a very profitable trade. In many cases, simply buying a put on SPY would pay more over the course of a red day.
But I want big gains...
This is why most of the 'real money' from this crash has already been made. The select few who purchased puts when SPY was trading above 300 made out like bandits -- capturing 10-30x returns. They bought their puts before the rest of the market realized that the crash was coming, so they didn't pay for the volatility and the coronavirus repercussions were not yet priced into the option premiums. Is it still possible to make a profit? Definitely. Some believe that the coronavirus crisis is 'overblown', so the market is still pricing uncertainty about further downside into the puts. 3-4x+ gains could still happen. If you buy puts now and enjoy a 200% return, it is only because of all of the entities underestimating the economic damage wrought by the virus. Assuming that the market continues crashing, it will be possible to turn a profit until the last bull capitulates (no coincidence that this is when the crash will end).
So how do you make 'big' (10-30x) plays? You have to know something that the market doesn't yet realize. If betting on SPY, you have buy puts before everyone realizes that the world is burning (too late, unless the damage is significantly more severe than the market has priced in -- SPY 145p, for example). The next big trade will be calling a lower bottom, or calling the trend reversion before anyone else realizes (buy calls at the bottom while hedging vega, or after volatility has dropped). In the realm of individual companies -- you'd have to pick a company that will suffer more than the market realizes, or a company that will thrive in the virus-wracked economy.
So, no, there is no free lunch. Sorry. If you identify a company that is 'sure to plummet', make sure that the market doesn't already know that.
TLDR: If you think a coronavirus play is obvious, check that this isn't already priced into the option's premium. When the market expects a company to swing wildly, it'll be right there, in the premium. This is why SPY puts can pay more on a 4% move than RCL puts would on a 14% move.
*Market makers don't actually profit from betting on trades -- they have an entirely different business model, based on capturing rebates from bid/ask spreads... They earn a commission from facilitating trades, basically. But options that market makers sell are still priced by the market, and thus priced so that the transaction represents 'fair value'.
EDIT: It's come to my attention that I need to add that IV is a core component of option value. When options have high IV, they cost more. If you didn't know this, you should read more about options.
EDIT 2: For the sake of accuracy, I'm adding this to the above: IV is option demand. Think of IV as the difference between the value that an option 'ought to have', based on fundamentals alone, and the price of the option on the market. It's usually back-calculated with an iterative function that determines the 'IV an option would need to have' in order to justify the price it currently trades at. So, when I say that 'when options have high IV, they cost more', it's a little circular -- when options cost more, they have high IV, and vice versa. But either way, high IV = expensive option. Up to you to determine whether or not this market demand is correctly pricing in the opportunity.
submitted by bemusedfyz to wallstreetbets [link] [comments]

Economic Symbiogenesis

Visuals
KEYNOTE - Below includes an original proof that for every rational individual, The Von Neumann-Morgenstern Utility Function is bounded from above. The proof starts below: “Proof Reductio ad Absurdum”.
The proof directly translates to: “a person wishing to be as rich as possible should not always be after more money.” A new question needs to be answered: “exactly how much money should that person be after?”
Economic Symbiogenesis
Thomas J Novak
Disclaimers 1. I wish to contend that Micro and Macro Economics each constitute a hidden branch of evolution. To be clear, I’m not arguing for an analogy, ​I’m arguing each branch is an evolutionary process; and with this comes the mathematical framework needed to scientifically ​objectify success (major goal for every Capitalist). 2. The quantitative aspects are partially rooted in Game Theoretic Evolution. I do not expect this theory will garner majority support or ​understanding. It is only an esoteric theoretical ideal; but it is my hope that this will gradually change until one-day we have a Utopia. 3. The mechanism is voluntary through rational self-incentives. It advocates for a change in perspective for optimal decision making purposes. 4. Dollars and other fiat currencies are still completely necessary. Fiat currency constitutes a valuable technology that eliminates the need for ​bartering, yielding considerable savings in life’s prime asset - TIME. 5. I apologize to the reader in advance for the long essay. I hope it is "worth" your time.
Key Conclusions
Present day humanity is full of capitalists that have the right idea but are missing some key math. This is causing them to behave inefficiently in the context of their own self-interests. Ideal Capitalism is Pareto Optimal and should be practiced by all; and it should lead to maximal economic growth. I also wish to conjecture that a new Nash Equilibrium is available to our race: Perpetual peacetime under the individual Pareto Optimal Strategy of Ideal Capitalism as every individual looks to maximize their self-fortune and troll farms are voluntarily dismantled. If this sounds too good to be true, note that it very well may have been for all of human-history save the last few decades. Key developments are nuclear weapons and the internet. Discussed more in the last section.
Introduction
The "science" of Economics is not yet a science. Don't get me wrong - micro-economics is just about there; but macro-econ is a totally different story. Some call it “The Dismal Science” because it makes many quantitative claims that are inconsistent with empirical data. An example is the claim that John Rockefeller’s fortune could be made comparable to contemporary fortunes by adjusting his dollars for inflation and real growth. In fact only adjusting his hours for real growth does the trick.
In general macro-econ has a zero-sum-dollar-centric structure that does not allow for input of things like maternity and child rearing - two fundamentally "valuable" human activities. Another problem is that planetary-wide risks like war, (and that which is assured by "Mutually Assured Destruction" (MAD)), are not naturally measurable in dollars.
Some concepts from financial mathematics and science can generalize economic measurements into a co-compatible theory that almost seems too simple to be necessary. Basic results agree with common sense in every way. Some conclusions are so obvious the calculation seems pointless. Others might be beyond common sense similar to the notion that the Earth on which one walks is anything but flat. The former supports credence for the latter. All examples of human stupidity supports a need for all of it.
Ideal Capitalism
Most powers past through present can be thought cold, "calculating”, and self-interested; and most presently embrace association with Capitalism. Paradoxically, human history, (even recent), is a litany of fighting and stupidity and hurt feelings. These are inefficiencies from the Capitalist perspective, so something must be wrong with these “calculations”.
The argument will start with a Micro-Economic exercise intended to provide quantitative framework to measure just how unCapitalistic many present-day capitalists are acting, by unitizing all their actions in a scientific manner. Any Capitalist wishing to maximize their net-worth will be made more materialistically rich simply by maintaining complete indifference about others, understanding the entire picture, and trusting numbers. Wall Street can confirm this is its goal.
“Complete indifference” means precisely 0 concern for anything other than material-self-worth and 100% concern for material-self-worth. Nonzero concern for others, positive or negative, is suboptimal since it distracts from the objective of maximizing self-worth. Footnote 1: “Others” does not include the friends and family category. All intentional altruism can be represented easily by having those individuals' interests summed and grouped together so as to be viewed as part of the Capitalist’s “self-interest”. All reasoning forward is unaffected by how many friends and family are now implied to be included.
The results can empower all decision makers to calculate in the only way possible: with actual mathematics. The numbers will sometimes disagree with intuition; but the numbers will always be correct. The optimal strategy will hardly change except for sufficiently wealthy individuals. The proof can be seen empirically by back-testing the model in history on the domain in which all success is measured: quality-weighted-time (qwt). The definition of qwt will leverage Game Theoretic Evolution and is discussed more below.
Some conclusions may be counterintuitive similar to the way natural selection favored Symbiogenesis; but maximum profit calls for absolute “trust” in numbers above all else - exactly as exhibited in microbial evolution. Any call for “selfless” acting resulting in benefits to others is strictly incidental; and any less is unselfishly selfish in that it renders this inefficient capitalist less wealthy than maximally possible.
Step 1 - Any political bias about aiding others should be deleted. An “Ideal Capitalist” expresses precisely 0 concern for others and what others think - no more, no less. As long as an individual is correctly acting in their own best interests, they are acting as a Capitalist. Contra-positively one can claim to be a capitalist and act inefficiently against their own interests as many “capitalists” will be shown are doing today. I suggest a new term “Maximalist” to mean an Ideal Capitalist and avoid the need for case sensitivity.
Step 2 - Success Spawns Success. What is meant by quality-weighted-time? The definition comes from the only objective arbiter possible: Evolution through Survival of the Fittest. Something is “fit”, or “successful”, if it results in more quantity (Q) or more quality (q), where more quality means it produced more Quantity faster - which renders it more successful. This is The Tautology of Evolutionary Game Theory (The Tautology). For any evolutionary process, quantity is the metric which quantifies success. Quality is measured in quantity per unit of time (q=Q/t). Note that multiplying q=Q/t with t yields Q=qwt: the metric of success that necessarily satisfies The Tautology. Footnote 2: The word “tautology” is meant in the propositional logic sense. No negative connotation should be inferred.
Step 3 - How to connect economics with evolution?
Micro-economic decision strategy for trading time (t) for dollars ($), (or $ for t), amounts to a “phenotype”, (or observable trait), coded for by genetics inherited or mutated, and ideas learned or created. Respectively: - Inherited genetics constrain every rational human to be “risk averse”, regardless of self-perception, because natural selection favored and continues to favor risk aversion. Defined below and proven further below. - Mutated genes are almost never favorable for a human so this case will be discarded (although this force is quite powerful over quintillions of human-hours). - Richard Dawkins creatively postulated ideas to be “memes”: new evolutionarily viable packets of information, subject to selection forces, as they spread from person to person with varying levels of success overtime. Respectively gene inheritance and mutation is analogous to meme learning and creation. Furthermore the economy can be seen as a subsection of the biosphere governed primarily by evolution through forces of selection. The economy evolves through selection of both genes and memes, and memes are more abstract; but this should not change anything about the evolutionary game theory. After all humanity itself is naturally occurring, so Artificial Selection of Genes and Memes can be seen as a more complex extended phenotype coded for by the evolution of genes through Natural Selection. Any argument that “Artificial Selection” constitutes a meaningful difference from “Natural Selection” must first come to terms with the observation that humanity is itself, naturally occurring.
Step 4 - What is the definition of “risk averse”? The mathematical definition of risk averse simply requires diminishing returns to be experienced on assets like dollars. For example: an additional $1M adds less “utility” if you presently have $2B, compared to if you presently have $2M. If a person is not risk averse, then more success encourages more risky behavior. This is inconsistent with the observation that more success means one has more to lose. Therefore any risk-inclined individual cannot be an Ideal Capitalist as they will almost surely go broke gambling.
Step 5 - What is “utility”? Utility is the abstract micro-economic concept that, by definition, quantifies value. The unsettled question of how to actually do this is addressed below.
Total Utility = True Material Self-Worth = “well-offness”. All have one-to-one correspondence with each other. All are “mutually inclusive”. For example: twice the quantity of utility, by definition, means twice material self-worth; and so, the individual is exactly twice better-off. Diminishing returns do not apply to quantities of utility.
Step 6 - How to define an objective function to maximize utility? Per Wikipedia: “Consider a set of alternatives facing an individual, and over which the individual has a preference ordering. A ‘utility function’ is able to represent those preferences if it is possible to assign a real number to each alternative, in such a way that alternative A is assigned a number greater than alternative B if, and only if, the individual prefers alternative A to alternative B.”
Keynote: dollars are not material wealth, dollars buy material wealth, with diminishing returns, limited by genes, memes, and the quality and Quantity of the Marketplace (respectively qQMP).
To illustrate this, consider how rich you would be with $1T cash on Mars in the present day marketplace. Personally as an oxygen breathing Capitalist, I would view my self-worth as constituting a liability - measurable in my personal subjective frame of reference in units of time, weighted by some self-knowable quality of life representing the quantity of misery per hour that I experience dying alone. Presently the quality of the marketplace on Mars is exactly 0 because 0 quantity is available for purchase. Footnote 3: The quality of life purchasable given the Time and Place is shown below to be bounded from above, although it is by no means bounded from below.
Back to Earth. If sufficiently rich, then maximizing material wealth calls for buying everything in desired amounts to maximize present quality of Life (qoL), holding ample dollars in reserve to spend on future quality (like a fancier vacation) and future quantity (like a longer vacation), and allocating the rest to increase future qQ which is not presently available for purchase (any new invention). In keeping with The Tautology, quality enhancements will provide for faster consumption of Quantity (Q=qwt). Note how perfectly this fits with The Tautology.
Ideally a good Capitalist with sufficient dollars would employ a strategy so as to maximize qoL at every point in time by exhausting most/all dollars by death. Any argument that an individual cannot meaningfully increase future qQMP fails. As an example: a medical breakthrough for genetic predispositions could yield considerably more time for any one capitalist, with expected returns modeled via actuarial mathematics. Consider just how far Humanity has come since the birth of The Enlightenment - it is easy to see how the not-so-distant future may include considerably more qQoL for sale. (Conversely the future may include far less qQoL if macro-decision-public-policy modeling continues to fail to quantify/unitize the cost of war - discussed more in the Macro Economic qwt section below.)
Quality enhancements, although more subjective, can be substantially accelerated by one talented individual. Examples include Albert Einstein, Bill Gates, Steve Jobs, Jeff Bezos, and Elon Musk. All are responsible for inventing and/or producing new things which I personally enjoy - the qQoL that I can purchase is greater as a result of their work. My time and money could not purchase such things if they were not invented. As discussed next, micro-economic quality weights are quality of Life (qoL) weights. They have an upper bound that can be “objectively” unitized and measured by the self-interested party's own frame of reference.
Step 7 - How can an individual objectively define an upper bound for these inherently subjective quality weights with any mathematical rigor? Is it possible to prove dollars can only buy so much utility? Yes!
Proof Reductio ad Absurdum
Ripping off an idea from one of the greatest thinkers ever - I propose a financial thought experiment: pretend it is possible for you to pause all of society and gamble at the “Name Your Winnings Casino”.
Here you can choose entering into an even bet: 50% of the time you win the largest number of dollars you can mathematically express = $P; or 50% of the time you suffer absolute ruin: the casino takes everything of material value and your dollars and returns you to the real world where no insurance policies exist for you and no friends or family are able to ease your loss by lending a couch to sleep on or pulling strings for a job offeinterview. If you lose you reenter the world a naked homeless person “worth” exactly $0 and you can never play again.
Four observations follow:
  1. The decision to bet is made independent of any consideration of others, consistent with the Ideal Capitalist.
  2. Any sane human with the smallest capacity for self-honestly could conservatively estimate a walk-away number A, (denominated in dollars), such that if present “net worth” is greater than $A then no bet.
  3. No rational person choosing to bet would play more than once because either they’d lose or they’d win $P and have received the payout they named. “Letting it ride” constitutes an obviously dumb decision born out of the unwillingness to simply express the larger number in the first bet; however, a risk-inclined individual always values more over what they have and so they would be compelled to keep betting. Therefore rationality is mutually exclusive with risk-inclination. Furthermore if the betting person is risk averse, then $A is strictly less than $P for some minimum value of $P.
  4. Some confident rational individual might argue no such number $A exists for them because they’re so good they can start all over if they lose and earn a new fortune; and it would at first glance seem this individual is correct.
Many logical conclusions result:
A. An honest estimate for $A irrefutably reveals a hidden upper bound for this individual’s “Utility Curve”. Specifically if the function A’($A) = A’ maps to utility derived by $A dollar denominated “wealth”, then no amount of dollars even exists for this individual to choose to bet. Mathematically: “Net worth” > “Bet value” => “Net worth” > “50% times upside minus 50% times downside” => A’($A) > .5A’($A+$P) - .5A’($A) => 1.5A’($A) > .5A’($A+$P) => 3A’($A) > A’($A+$P) for all values of $P (The left hand-side must be greater or the bet would not be declined by a rational individual.)
B. 3A’ is not presently purchasable with any amount of dollars. 3A’ may be purchased in some future marketplace, (possibly with less than A future dollars), in the form of a medical breakthrough or buying future children birthday presents, but it is not currently purchasable in the present as demonstrated by the individual’s refusal to bet. Conversely A future dollars may lose “purchasing power” of just A’ if the future marketplace is inferior. Therefore true material-worth is fundamentally a function of the marketplace and cannot even be expressed in terms of dollars.
C. Most choosing to bet would logically express the upside payout $P as a sequence of 9s. Many more would know to use powers of powers. Knowledge of Knuth’s Up Arrow Notation could simultaneously save time and yield considerably “more upside”. Due consideration for exactly how much time should be spent writing out fantastically large numbers reveals an irrefutably objective hidden limiting factor: this person’s lifetime - measurable in units of time. This reveals one of two hidden domains on which value must be measured - TIME!
D. From this it directly follows that the confident individual in (4) is wrong. Some number $A greater than $P must exist, EVEN FOR THEM. However this individual is sure $A doesn’t and keeps writing numbers out for $P until they die. Therefore $A for them equals the number they have written out at time of death, never having played the game. I believe this is the definition of a Darwinian unfit capitalist - completely inconsistent with the Ideal Capitalist.
Analysis
The argument above establishes a horizontal bound for utility – lifetime measurable in units of time. It also establishes a finite upper bound for utility itself (represented by the area of the “utility rectangle” - see spreadsheet). This implies a finite upper bound for the rectangle’s height must exist; and this is empirically supported by the observation that billionaires are not known to blow through their life fortune in any short-period of time.
So why does any sufficiently wealthy capitalist focus on earning more dollars and die before exhausting most/all of their dollars (last death if family inheritance involved)? If sufficiently wealthy, material wealth is necessarily a bounded function of The Time Period, or the “quality and Quantity of the Marketplace”. TTP = qQMP >= qQoL. In other words, the marketplace itself is secretly an asset for every Capitalist!
qMP(TTP) = Max quality of life, or “max utility per hour” available for purchase in TTP QMP(TTP) = Max Quantity of life, or “max utility” for purchase in TTP (IE a longer vacation or medicine)
Thus on the micro level, quality weights are utility weights; and utility weights are capped by The Time Period. Thus it is the case that for every (finite) individual, a finite upper bound for utility is self-measurable in Time Period-Weighted Time (qwt = TPWT). For example: 2020 hours have far more value to any sufficiently rational and wealthy individual (SRWI) than 1920 hours. And as the earlier questionnaire (hopefully) shows, this is realizable by most middle-class people today. In other words, today’s middle class is sufficiently wealthy to the extent TPWT resolves the Rockefeller paradox. Footnote8: The size of the middle class itself is unfortunately shrinking. This has potential to result in negative externalities for all.
Since an Ideal Capitalist maximizes self-material-wealth above all else, then if they were also sufficiently wealthy, they would measure value in Time-Period-Weighted Hours since they would always purchase maximum utility per hour. This is by definition, since any SRWI has all necessary means to purchase max utility available per hour. (Note just how important quick access to true information would be.) Footnote 9: Neuroscience could use Magnetic Resonance Imaging (MRI) to objectively measure the Micro-Economic utility unit as “Neurotransmitter-Molecular-Count Weighted Hours”. Consideration for how to weight different neurotransmitters (like Serotonin vs Dopamine) would be necessary. For now, we are all similar enough for “time” to suffice, at least for short run measurements. For example: what is the penalty for severe crimes? “Time in jail” or death (all the person’s time).
Quantifying the Marketplace
Given the average life expectancy now is more than twice that of prehistoric man, the marketplace itself is worth strictly more than 50% of any sufficiently wealthy individual’s “asset portfolio”. Just note “time is money”. Footnote 10: They need not be rational to "realize" this time, so long as their doctor is sufficiently competent. "Realization" will come in the form of living longer, quite consistent with the accounting definition of gain/loss realization.
Keynote - a Maximalist will do more than just maximize present qQ purchased. They will also divert unneeded dollars to maximize future qQMP so that more qQ is available for purchase. Thus the Maximalist calculation includes due consideration for additional dollars that will be needed given future qQ becomes available.
Squaring Theory with Reality
Most already know most of this, at least on the common-sense level. So why don’t sufficiently wealthy Capitalists invest maximum dollars with less strings attached to maximize the future? Is it because that would help everyone else and constitute socialism? No! In this context socialism is Adam Smith’s “Invisible Hand”. A good Capitalist aims for precisely 0 concern about others, and any concern for implied socialism would constitute nonzero concern. Such concern would amount to incomprehensible irrationality far beneath any good Capitalist. So what else could it be?
Perhaps it’s simply the fact that much of humanity is still measuring their net-worth in the wrong dimension for the inefficient purpose of feeling superior to others with less money. Anyone currently doing this quite literally knows the price of everything and the value of nothing, not even their own self fortune, because they are using the wrong dimension of measurement. quality-weighted-time is the objectively correct way in which real value should be measured, and quality weighting is limited only by The Time Period in which time and money are being spent.
More noteworthy, any human mistaking dollars for qwt for this scorekeeping reason is still violating the prime rule of being a good Capitalist - they are demonstrating nonzero-concern for what others think of them. Implicitly and inefficiently, these individuals are expressing negative concern for others, as now is measurable by how worse off they are in units of their time. Specifically this is calculable as the opportunity cost of not investing more dollars for an enhanced future marketplace, measurable by others in said marketplace by the cost to this imperfect capitalist’s life expectancy, (all unitized in units of time).
Equity Miracle Swap Instruments
Perhaps the above explanations are not exhaustive of the full truth. Maybe some sufficiently wealthy Capitalists simply do not have the means to invest their dollars in a way that can reliably pay greater dividends. Therefore I propose a new type of financial derivative instrument called an “Equity Miracle Swap”. These would be voluntarily issued as contracts from the mega-wealthy. Here is a hypothetical example:
Rational (and thus risk averse) Billionaire-G (BG) possessing $100B in dollar-denominated-capital can now do research and will likely find they are genetically predisposed to a (presently) incurable illness (let’s say Small Cell Lung Cancer = SCLC). BG could use the chancy math in the proof above and might determine that Billions $91-$100 have minimal true value to him/herself when converted to qwt. Therefore BG could decide to start up an enterprise to find a cure for SCLC and use a $10B Equity Miracle Swap = EMSSCLC-$10B, or just “EMS” for short. The purpose is to maximally incent the researchers, who might otherwise just be employees. The contract would stipulate that all equity in the enterprise transfers over to the research team only upon successful development of the cure.
When measured in dollars, the payoff for BG is represented by the performance of the stock, which is greater than -$10B if no cure; or -$10B if the miracle cure is found. The former is greater than the latter. Which do you think BG will prefer? Obviously the latter, especially if they wind up contracting SCLC in the future! But the former was greater measured in dollars? How to reconcile?
This can be quantitatively reconciled by using the correct unit of measurement - qwt. Here is how: the newly discovered cure might empower their remaining dollars to purchase considerably more qwt in the future. The real expected return on investment for BG could be calculated actuarially as follows: Expected ROI = { Expected Return }/{ Investment } = { E(Δqwt | Miracle) * [ P(Miracle | EMS) - P(Miracle | no EMS) ] }/{ A’($100B) - A’($90B) } Where: 1. A’($D) maps to utility measured in quality-weighted-time presently purchasable by D dollars 2. E(Δqwt | Miracle) = Expected change in purchasable qwt given miracle cure occurs in lifetime 3. P(Miracle | Event X) = Probability of Miracle given Event X
Note that because BG is risk averse, diminishing returns render billions $91-$100 worth very little qwt. Therefore the cost in the denominator = A’($100B) - A’($90B) constitutes a very small amount of qwt, rendering the expected ROI very large, even for relatively small changes to P(Miracle). Obviously the lawyers could tinker with the terms of the contract. Finally note that society is incidentally made better off if the cure is found.
Macro-Economic qwt
Please now consider the benefit of a qwt-centric model from a Macro-Economic standpoint in the context of the Doomsday Clock, where as always, economics can objectively measure value (or “GDP”) in units of quality-weighted-time. On this Macro scale, the quantity unit will be "Healthy Human Hours", calculated as always by multiplying quality weights of presently healthy humans, with units of time, where any human is healthy if he/she produces more future human hours. Note how naturally maternity and child-raising now fit into GDP.
This may also help resolve the argument over which crimes should be punishable with incarceration - specifically only crimes where the individual is deemed likely to contribute less negative future qwt to GDP when in jail vs when out of jail. Also there is a natural extension of this for the death penalty, although I do not wish to make such moral judgements. Footnote 10: Any argument that population overgrowth leads to mass death is correct. Policy models need only step back and estimate healthy human hours in the more distant future. Calculus can be used to model public policy decisions from present-day infinitely far into the future and compare infinite relativities for different policy options.
Also consider that actuarial modeling could be used to objectively estimate the cost of disinformation posed to every Capitalist on the planet, measurable of course, in units of time. Specifically calculated as expected changes to Humanity’s Expectation of Life on the Doomsday Clock, plus individual life expectancy given Midnight, times the probability of midnight. Also observe the need and means for due discount in modeling the "decrease" in the future qQMP (which might include radiation).
The Emergence of Economic Symbiogenesis
Try to arrive at the conclusion any good Capitalist must. Here is a hint - genetic Symbiogenesis resulted in the planetary-wide cooperation of all plant and animal life to regulate Earth’s Oxygen concentration. Note the immense success is, of course, measured in qwt. Weighting in this context needs to satisfy the same tautology as always. Therefore the final answer on this Mega-Macro scale comes in organism-count-weighted units of time. This is the current game strategy that genetic Evolution has concluded on Earth to date. It came from pitting individual selfish microbial interests against one another in the 0-rules game of survival of the fittest. The result is the current marriage between the Plant and Animal Kingdoms! (Like all great marriages there are still a few mentionable skirmishes.)
Also observe the micro-macro relational analogue between Chloroplasts and Mitochondria with Plants and Animals. Consider how this might analogize individual decision making with the marketplace as a whole.
If you are religious, consider just how correct this implies your understanding of God’s wish for the general wellbeing of every individual to be.
My conclusion is that there is a trail of breadcrumbs for our species to follow and we’ve had the right idea all along. We’ve just been doing the math wrong. Now every decision maker can better understand how to measure their own self-fortune and get to growing it faster!
Also interesting is the game theoretic argument for why every person must be allowed full forgiveness - it is the only way world leaders who are concerned for their own wellbeing could possibly embrace such a model. Astonishingly full forgiveness is 100% consistent with every major religion’s claim of what God hopes all of us can achieve. In economics, any desire for revenge can now be seen as The Sunk Cost Fallacy, measurable as always in units of qwt.
Finally, I wish to conjecture that a new Nash Equilibrium is available to our race: Perpetual peacetime under the individual Pareto Optimal Strategy of Ideal Capitalism as every individual looks to maximize their self-fortune and troll farms are voluntarily dismantled. If this sounds too good to be true, note that it very well may have been for all of human-history save the last few decades.
Key Technological Developments 1. The advent of nuclear weapons which align all of humanity's interests in a way which never used to exist. Even survivors of a nuclear war will be far worse off, now as measurable by decreases to the quality and Quantity of any future radioactive marketplace. Less qwt for purchase! 2. The advent of the internet renders information around the globe nearly free and instantaneous. If we can learn to be more self-interested, the only conclusion which rationally follows is to dismantle all troll farms for the simple purpose of maximizing Macro Time until Doomsday. The New Nash Equilibrium available to our race could be quantitatively modeled with actuarial techniques, and the optimal solution is to push Midnight infinitely far into the future by allowing every rational decision maker the means to make rational decisions with 100% true information. The internet sets up a worldwide analogy with our nervous system.
Footnote 11 - The Micro-Economic Model is now consistent with John Lennon's definition of life success: happiness. When asked what he wanted to “be” when he grew up, John responded "happy". John’s teacher thought he misunderstood the question. If John's teacher had instead followed up with the question to quantify: "How happy do you want to be?" - John could have replied: "as happy as possible for all my years.”
Footnote 12 - Warren Buffet's advice to "do what you love so you never work a day in your life" is quantified naturally by the model. I hope that more will start to take this advice. The qwt-centric-micro-model shows they will quite literally be made richer as a result. Given that richer people tend to contribute more to GDP, society will be made incidentally better off as a result. Star Trek almost had it but missed two words: “we work to better ourselves, and incidentally, the rest of mankind”.
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How to be Wrong and Still Make Money: A comprehensive guide to selling credit spreads

So I first dipped my toes into options trading a few years ago. I had previously been swing trading stocks so I had a couple years of experience before that, but the leverage and potential returns that options provided really piqued my interest. After it was all said and done, I lost almost $20,000 buying options. After realizing that someone was getting all of this money I was losing, I learned about option selling and haven’t looked back since.
I recently posted my YTD performance here, and received a lot of questions about how I did it. My strategy changed over time, but I first started with credit spreads, which may be applicable to more people since it’s a strategy that works with smaller accounts too. I got a lot of questions about how I played credit spreads and it’s tough to completely explain what I do through a comment here and a comment there so I created this guide explaining my exact approach to trading credit spreads. Here you go:
This is a wall of text, so if you're a more visual learner, here's a link to videos explaining all four parts:
Part One
Part Two
Part Three
Part Four

Part One: The Basics

So what is a spread? A high level conceptual explanation is that you’re essentially betting on a stock to finish above or below a certain price upon expiration. One of the advantages here is that you can set this number out of the money, so if a stock is trading at $100, you can bet that it’ll remain below $110 by a certain date. This is a bearish position, so if you’re correct and it goes down, you’ll make max profit. The catch though is that even if you’re wrong, you basically have a 10% upward cushion before you start to lose any money. So the easiest way to describe it is a strategy that lets you make money if you’re right, but also make money if you’re slightly off.
How does it work? So in the above example, if we were bearish on a stock we would open what’s called a call credit spread. We could set it up where we sell a 110c for a credit of $1.50, and buy a 115c for a debit of $0.50. This means that in this transaction we receive $1.50, and pay $0.50 for a net credit of $1. That credit is your max profit on the play. If you’re familiar with options you’ll know that if the stock finishes at or below $110 upon expiration, both of these calls will be worthless. That’s great news for us because the long leg we bought (115c) for 0.50 will be a loss, but we’ll get to keep the full $1.50 from the short leg (110c) that we sold, resulting in us realizing our max gain on the trade of $1.
Why not just sell the 110c and collect the full $1.50? While it cuts into our profits, the reason we buy the 115c in this example for $0.50 isn’t to cut into our profits when we’re correct, but rather protect us when we’re wrong. If the stock in the example stays below $110, we’re good to go and we’ll hit max profit. But what if it goes to $120, $150, or something crazy happens and it hits $200. If the stock hits $150 upon expiration, that 110c that we sold for $1.50 will be worth $40, meaning that we’ll incur a $3,875 loss in pursuit of a $150 gain. We’ve seen crazy run ups from the likes of TSLA and ZM lately, and people who sold what we call “naked options” got absolutely killed. With our spread, yes our 110c will be worth $40 meaning we’re down $4,000 on that position, but the 115c we bought behind it will be worth $35 meaning we’re up $3,500 there for a net loss of $500. Additionally, we get to keep that $1.00 credit we received up front no matter what, so our loss with this spread is actually $500-$100=$400 as opposed to the $3,875 loss that we would’ve seen had we sold the 110c by itself. THAT is the value in selling a spread as opposed to a naked option.
Why are you multiplying everything by 100? Each options contract is worth 100 shares, so a contract that is trading for $1.50 actually costs $150 to purchase.
Another high level point I like to make is that there are really 5 different things that can happen when you make a play. Let’s say you think a stock will go up. It can (1) go up a ton and you’d be correct, (2) go up a little and you’d be correct, (3) trade flat and you’d be incorrect, (4), go down a little and you’d be incorrect, or (5) go down a lot and you’d be incorrect. With a bullish spread, you’d hit max profit on 4/5 , or 80% of the possible outcomes, whereas if you bought stock or purchased an option you’d only be profitable on (1) or (2). Obviously the actual outcomes are a little more complex, but for a base-level understanding of the advantages a spread provides, I think this is a good way to look at it.
So that’s the value of a spread. A lot of traders are introduced to option selling and are scared of the prospect of incurring a huge loss like we mentioned above, but using credit spreads is a great way of receiving the benefits that selling has to offer while limiting a lot of the risks. So let’s move onto actually opening a spread.

Part Two: Making the Trade

So for actually opening a spread up, we have a four-step approach we take: Pick a Stock Pick a Direction Pick a Strike Price Execute the Trade
1: Picking a Stock:
One of the most important things I tell people is to trade what you know. I have a watchlist of 25-30 stocks that I watch and get familiar with during the day. That way if I recognize a good opportunity, I’ll have a decent base of knowledge to rely on to make what I feel is a smart play. It’s super easy to get caught up in the “stock of the week” and try to jump in on a play because a ticker is in the news. If you’re not familiar with a stock, don’t trade it.
For this example (the one used in the video), Wayfair was trading in a 195-210 range for a little bit and then had a big day where it broke up out of that range and up towards $220. This was an unusual move that I noticed since it was on my watchlist, so I decided to make a play.
STOCK: WAYFAIR
2: Picking a direction:
So if we look at Wayfair’s YTD chart, it has exploded this year. A clear upward trend, but a recent trend that I noticed from following the stock was that every time it broke out like this, there would be a little bit of a pullback afterwards. Additionally, I felt the stock was overvalued on a fundamental basis (had a negative book value at the time of the trade) so I wanted to play this stock back down. This is probably the quickest and easiest step of the four, since you’ll likely already have an opinion on most of the stocks that you follow.
DIRECTION: DOWN
3:Picking a Strike Price:
So we know that we’re going to be playing Wayfair back down, but now the question is what spread are we going to set up to do that. In this example Wayfair was trading at $218.42 at the time that we decided to make this trade. In the video we illustrate a trading channel that Wayfair was at the top of. It was also approaching the ATH of $221.54. A lot of the time that will act as resistance for a stock, meaning it’ll bounce down off of it. So in order to give ourselves a bit of a cushion we decided to set our short leg at 222.50, meaning that we’re playing the stock to stay below $222.50 by the end of that week.
So with this play it means in plain English that if we’re correct and the stock goes down, we hit max profit. But if we’re wrong and it goes up, we still have a $4.08 cushion before we’re not hitting max profit anymore. So we could be a little wrong, have the stock go up a few dollars, and still walk away with max profit.
STRIKE PRICE OF SHORT LEG: $222.50
4: Executing the Trade:
I’ll be the first to tell you that when I started trading spreads I didn’t realize you could open both legs of the spread at once. I was stupid. I would like to think I’m at least a little bit smarter now. If you look at the options screen for most brokers, you’ll just see single legs. Switching over to “vertical” allows you to set up the entire spread in one trade. If you use something like RH, there’s a feature that allows you to select multiple options, so you’ll select the one you wish to sell (short leg) and the one you wish to buy (long leg).
In this example we selected the 222.5/227.5c spread, meaning that we sold the short leg of 222.5 and the long leg of 227.5. The net credit was 1.45, which is our max gain on the trade. A wider spread gives a larger credit but also increases max loss. This is a $5 wide spread but we could have made it a tighter spread with a $2.5 width. Typically the best risk to reward ratio is on the tightest spreads, but a slightly wider spread will raise your breakeven price and studies have shown that it actually results in better expected value long term.
Circling back to the credit we received of $1.45, this means that our max profit was $145 and our max loss was $355 for each spread that we sold. We know that because our broker tells us that, but a quick way to calculate it is the width of the spread minus the credit. A $1.45 credit on $5 wide spread means a $5-$1.45=$3.55 max loss.
When I evaluate trades like this I look for a max profit to max loss ratio of 1:2 to 1:4. Based on different scanners I’ve seen, the best expected values tend to fall on spreads within that risk/reward ratio. The ratio on this trade is 1:2.44.
So we put our order in for a credit of $1.45, it filled, and now we get to sit back and watch. Sometimes your order won’t fill right away. In fact, most of the time it won’t fill right away. It’s important to be patient with your fill price and not chase it downwards. We want the highest credit possible. So if the credit on these spreads dropped to 1.30 when I was trying to place an order, it usually isn’t a great idea to drop my order price down to 1.30 just to get a fill. The only time I would recommend that is if you’re trying to open a spread right before the market closes. Otherwise, hang tight. Patience pays.

Part 3: Managing the Trade

So now that we’ve made the trade, it’s time to manage it. In my opinion one of the best parts about trading spreads is that they don’t require active management. You get to sit back and watch the price. Once the trade has been opened, which is also quick, it takes very little effort.
So with the Wayfair example we used, our analysis turned out perfectly, as Wayfair touched the ATH and dipped back down to end the week safely at $214. We hit max profit on that trade, but what if the trade goes against us? That’s what we’ll take a look at in this section.
One thing we didn’t address in part two is when to open the trade. We like opening spreads on Mondays and Tuesdays, and monitoring them during the week. This is the part of my strategy that is a little bit controversial, as there is a (legitimate) school of thought that selling spreads about 45 DTE is better value. I like that idea and if you would rather do that then absolutely go for it. It’s important to trade what you’re comfortable with. All of the lessons in here still apply to that strategy. With that said though, I stick with the weekly strategy of opening them at the beginning of the week and look to close them throughout the week.
The way I see it, your % of max profit should be the metric you’re looking at when deciding what to do with a spread. Divided up equally, that means if you progressed through the week to max profit in a linear fashion, you would be at 20% of max profit on Monday, 40% on Tuesday, and so forth. A good rule of thumb I use is that if you’re ever on the fence about whether or not to close something out, do so if your return exceeds the linear return for that day of the week. The market can move quickly and I’ve had several times where I have regretted not closing a spread out. It’s important to take profit.
Another thing I’ll add to this is that this weekly strategy gets a little risky on Thursday afternoon headed into Friday. If your spread is remotely close to being in the money on Thursday afternoon, close it out. Now that I type that out I realize that may all sound a little convoluted, but it’s better visualized in the video I’ve linked for this section.
Now let's get into what happens if a trade really starts to move against you. With the strategy we use there are really two options: (1) Close the trade for a loss and move on, or (2) Roll the strikes higher.
The first option is pretty self explanatory, but a quick note I want to add here is that you can have a stock move way against you but still be able to close the trade for less than max loss. The example I use in my video is I played FB earnings, thought it would go down, but it shot way above my spread and well into max loss territory. We opened a 245/247.5c spread for a credit of $0.54. FB was reporting earnings on a Thursday night and we sold this spread that expired the following day, so there wasn’t a ton of time to manage it. Long story short, FB killed earnings and shot up to $256 that morning. Really not a prayer that it would come back down to the spread I opened by the end of the day. But despite the fact that this trade went way against us and we had almost no time to manage it since it was a Friday play, we were still able to close out for a debit of $1.90. Yes that’s a loss of $1.36 per spread, but we SAVED an additional $0.60 cent loss by avoiding a max loss debit of $2.50. That’s another benefit of spreads.
Let’s talk about option two. This is the best option to use if you’re confident that you’re correct about the ultimate price action on a stock, but you need a little extra wiggle room on the trade. For this example we’ll look at a TSLA call spread that I opened. TSLA was trading at $1542 after an incredible run, so I figured I would play it below 1600 with a 1600/1610c spread that offered a credit of $2.52. As is the theme with this section, TSLA exploded the following morning (Tuesday) and went all the way up to $1794 at one point. My spread was literally almost $200 out of the money. One of the biggest possible moves against myself that I had ever seen. Despite this crazy move, it was only Tuesday and we were able to close the first spread for a debit of only $5.25 (as opposed to a $10 max debit). We opened 6 of these off the bat so this was a loss of $1638. From there we “rolled” our strikes higher, opening 10 1750/1760c spreads for a credit of $3.45. So the closing and subsequent opening of a spread like we did here is what we are referring to when we say we “rolled the strikes higher”.
By the end of the week TSLA had finally crashed a bit and it finished at $1506. This meant the second of spreads we opened were easily max profit. And while we lost $1,638 on the first set of spreads we opened here, we profited $3,450 on the second set of spreads so we were able to still finish the week with a $1,812 profit on TSLA. The funny thing with this one is that the original spread would have hit max profit since it dropped all the way back down to 1500, but we would have had the same result had TSLA finished anywhere below 1750.
Rolling the strikes higher gave me extra breathing room and turned a potential disaster into a profitable trade. One thing I’ll add though is that with this method you do run the risk of increasing your potential max loss. Because of that, I’ll only roll my strikes higher ONCE. Anything past that is chasing a losing trade. If I roll my strikes higher and it’s still going against me, I’m at the point where I need to accept the fact that I don’t fundamentally understand a stock as well as I thought I did and move on. There is always another trade out there.
The final point I’ll add to this is ALWAYS CLOSE OUT YOUR SPREADS. The only time I’ll let a spread expire worthless is if my spread is OTM by a crazy amount and it would quite literally take a historic after-hours move on Friday to take me back ITM. Other than that, close your spreads out. Even if it’s just for a $0.05 debit. It may seem annoying but I’ll tell you why in the following section.

Part 4: Additional Risks and Considerations

I will start this section by saying I’ve never been impacted by any of the following risks, but it’s important to be aware of 100% of the possible outcomes of your trade before you enter it. They’re infrequent but this really wouldn’t be a comprehensive guide if I omitted them. They are as follows: (1) Early Assignment, (2) Dividend Risk, (3) Pin Risk.
1: Early Assignment:
The best way to start this section is by talking about why your max loss is actually your max loss. We know it’s quickly calculated as the width of your spread minus the credit, but why is that?
Let’s use a 110/115c spread as an example. We’ll say we received a credit of $1. We know that if the stock finishes anywhere below 110 then both legs are worthless and we’ll hold onto that $1 credit. But what happens if we’re in a max loss position. Let’s say the stock finishes at $120.
In this situation the short leg (110c) we sold would be worth $10 (120-110), meaning that we would owe $1,000 on that position. The long leg we bought would be worth $5 (120-115), meaning we are holding a position worth $500. The net effect is a $500 loss, but remember that’s netted against the $100 credit you received, so it’s a max loss of $400. That math checks out as the width of the spread is $5, the credit is $1, so the max loss is 5-1=$4*100=$400.
So that’s how it works upon expiration. But lets say this position moved against you, you still have a few days until expiration, but the stock is at $120. Since there are a few days left, you probably could close the contract for a debit of $3.50 rather than the max loss debit of $5. However, since your short leg is ITM the person you sold the option to may choose to exercise their option. As a result, that would require you to take on a short position of $110*100=$11,000 per contract sold. You may not be able to afford to cover that, or your broker may not let you hold that position. So what happens is your long leg gets exercised as well resulting in you taking a max loss early. So while on paper you received a credit of $1 that could have been closed for a debit of $3.50 and your loss was only $2.50, early assignment results in you prematurely taking a max loss.
When does this happen? It typically doesn’t, since it requires the buyer sacrificing the remaining extrinsic value on the option, but it’s more likely with certain stocks. There are three different classifications of a stock that relate to it’s borrowing ability: Easy to Borrow (ETB), Hard to Borrow (HTB), and Not Available to Borrow (NTB). The harder a stock is to borrow, the more likely it is that a call is exercised early because it gives the buyer a way to acquire a stock which may not be available to them through their broker. So if you’re selling call spreads that are close to being ITM, make sure to check out the borrowing status of the stock.
2: Dividend Risk:
This risk relates to the first one discussed, as it’s just another way you risk early assignment. If a company is announcing a dividend, there will be something known as an “ex-div” date, which means that all shareholders as of that date are entitled to receive the divident, which will be distributed usually at a later date. Because of this, call buyers may exercise an out of the money call option in an effort to acquire those shares.
Remembering that exercising an option means that you sacrifice all remaining extrinsic value, another reason a buyer may exercise a call option before an ex-dividend date is that the value of the dividend announced is greater than the extrinsic value remaining in the option. Say a 100c is trading at $2 and the underlying (stock) is currently at 101. The extrinsic value is the value of the option in excess of what it would be worth upon expiration. So the extrinsic value in this situation is $1, since the 100c trading for $2 is just $1 in excess of the current strike price. If the company in question here announced a $2 dividend, an option buyer would likely exercise their call option because the $2 dividend is greater than the $1 of extrinsic value.
3: Pin Risk:
We know that if your spread finishes out of the money it’s a max gain and if both legs of your spread finish in the money it’s a max loss. But what happens when the price of a stock finishes between the two legs of your spread? Let’s take a look.
So using a 100/110c spread as an example, let’s say that the stock finishes at 105. Your long leg, which is there to protect you, is worthless so you wouldn’t exercise it. However the short leg at 100 that you sold will be exercised by the buyer since it’s ITM. As a result, you’re now short 100 shares at a price of 100 and you’ll be holding that position over the weekend. This can go both ways from here, but since we’re focused on risk let’s say that this stock you’re now short shoots up over the weekend and some sort of news/event brings it up to $120.
With this short position of 100 shares at $100 you’re borrowing $10,000 worth of stock. Now that the stock is worth $120 this position is now worth $12,000. Over the weekend you’ve sustained a $2,000 loss. If we received a credit of $3 when we opened this spread, we may have thought that our max loss was 10-3=$7*100=$700. Since we failed to close the spread out, this position has now resulted in a $2,000 loss net of the $300 credit that you received when you opened the position. So on a trade where you thought you could lose at most $700, you’re now down almost $2k.
I can’t repeat it enough, but THIS IS WHY WE CLOSE OUT SPREADS BEFORE EXPIRATION. That is the single most important takeaway I can give you here. Spreads are great since they’re defined risk and defined gain. When you’re buying options you have a defined loss but a potentially infinite gain. This can make it really easy to get greedy and I’ve seen countless traders lose big profits because they keep holding out for more. When you have a defined gain and defined loss it makes it easier to make smart decisions, take profits, and continuously build on those profits over time.
That was an enormous wall of text but I hope it helps explain, from a base level, what spreads are and how they work. Switching from buying options to selling options has dramatically changed my performance in the market so I hope sharing this can do the same for someone else. If you have any questions let me know and I’d be happy to answer them.
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Swing vs. Day Trading - Which is Better? - YouTube CFDs vs Spread Betting - Why Use a CFD over a Spreadbet? ☝️ Understanding the Different Between Swing Trading and Day ... Day Trading For Beginners 📈  Stock Market 101 - YouTube What is the Difference Between Day Trading and Swing ...

Spread betting and day trading using spread bets, is a high-risk high-reward, and tax-efficient way of speculating on the markets. From trading platform, to how to trade and trading strategy, this page will break down everything you need to get started intraday spread betting and online trading. Day Trading Tips for Spread Betters. As an investor looking to profit from moves in the market you will either be trading in the short, mid or long-term. Day trading as a trading style is about holding positions for a few hours, minutes or even seconds. When it comes to online trading, there are many different strategies involved. The key difference between spread betting and CFD trading is how they are treated for taxation. Spread betting is free from capital gains tax (CGT) while CFD trading requires you to pay CGT*. Spread betting is also only available in the UK or Ireland, while CFDs are available globally. The margin in CFD trading is calculated as a percentage of the exposure, whereas the margin in spread bets is calculated by multiplying the stakes by the Notional Trading Requirement. Another point of difference between CFDs and spread betting is the way the trades in the two are placed. The key difference between CFD trading and spread betting is the tax implications. In the UK, profits from spread bets are exempt from tax while CFD trading profits are subject to capital gains tax. Other differences include the unsuitability of spread betting for hedging and that spread bets are only available in certain countries.

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Swing vs. Day Trading - Which is Better? - YouTube

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