Event-Driven Trading: Risk and Metagames

Event-driven trading is done by global macro places and their subsidiaries. To get an idea at the risks they play, just look at the risks that are legally required to be listed on any 10-k annual securities filing with the SEC on the American stock exchanges. There is a listing of risks of events that may happen. Betting on these events can be thought of as pricing an option that turns into another type of option upon expiration instead of turning into a fixed payoff. In short, betting on events can be thought of as betting on exotic options. This is because gauging scenarios is one way to understand all the risks involved but another way is to think deductively and understand that after first options fail, second options make a stand and then you have no options as they destroy your artillery in Napoleonic times. An exotic option can be thought of as a bet on infantry predicting the right direction on average but all that matters is one time as that is enough to lose all your money, followed by a bet that cavalry can sweep the field, and then that is all that is required as if you cannot hold the field then, you will lose the artillery and the game is over. One can think of it as your fundamental research traders move first to predict the direction of events, and then your volatility traders, after which if your global macro traders still have no clue you are going to lose the game. This is encapsulated in an exotic option as one trade and handed over to the option trader to take the lead. Fortune they say favors the bold. And that is why the women liked to watch the cavalry charges with the handsome soldiers in the Crimean War. Flashed their sabers bare! flashed their sabers in the air! They came back but not all five hundred of them, the light brigade! Courtesy Lord Alfred Tennyson. We see that models can come before or after the fact. It is not intuitive to use Napoleonic tactics to trade but if that is what you are doing already, then it makes sense to think of oneself as doing that. Brevan Howard uses Wellington style. I prefer Publius style and the Gallic Cavalry back in Roman times when we were all on the same side approximately. I am such an exotic beta trader now I can’t think global macro without wanting to mix in some Greco-Roman classics with some Jeffersonian Democracy on the Euphrates. Exotic beta starts with exotic options in my view and basically uses options trading which is Cavalry to solve all problems even the problems of charging artillery front on with fire from three sides like right now: I am American. I love Kyoto. I breathe Tel Aviv. Taipei 101! You can have your empire, I will have eternity by Calvin Klein, I will love her forever. Do we leave some money on the table? “Be kind for everyone fights a harder battle” -Plato. Sometimes it doesn’t matter what you think or what you say. Sometimes it just matters what you believe. I asked: “can they take me higher?” I asked: “can we stay?” – Creed


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