Sunday, December 27, 2009

Option valuation and your job

This morning my family and I went to a bris. For those who don't know, a bris is the ritual circumcision of a Jewish baby boy. This is the highest delta, short volatility job in the world, as far as I'm concerned.

What do I mean? By "short volatility" I mean the Mohel, the guy (usually) who performs the circumcision, gets paid a specified amount that is fixed, and all he can do is perform it correctly at best. There's no upside. At worst, well you can's not going to be very good for the baby. And, the mohel will very likely never work again.

More technically, we'd say the mohel writes puts on a disaster. This is like writing catastrophe reinsurance: Rare events that have extremely high losses. But, it's worse! The actor is perceived to have skill and control, whereas hurricanes and earthquakes are not in any way controlled by the underwriters of those risks.

[This leads me to want to investigate liability insurance premiums for these professionals. Then, we can evaluate if they charge reasonable fees for the risk they take. My guess is they don't charge enough. Their liability insurance does not replace their lifetime income. I think it is fair to say a catastrophic loss means the NPV of lifetime earnings goes to zero. A "stopping time" for the technically inclined.]

There's nothing wrong with performing work that is short volatility. Most people probably prefer long volatility. Talk to professional options traders, they'll tell you they certainly do. Nassim Taleb is all about long volatility.

When thinking about all investments, both financial capital and human capital, you always need to know what vol risk you are taking.

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