6 ms·

More like selling a put: you're hoping it expires out of the money, but if volatility goes up, it will be expensive. Upside is limited and short term, downside

by crdb 10y ago

More like selling a put: you're hoping it expires out of the money, but if volatility goes up, it will be expensive. Upside is limited and short term, downside potentially unlimited and in the long term, so if your discount rate is high (due, perhaps, to low cash reserves) then the NPV of the trade still makes sense. People who sell a few puts get away with it for a while, but make it your business and you better be too big to fail. If everybody is selling puts and levering up, you better do it too or you'll find yourself out of a job. And if volatility increases, everybody is exposed at the same time so you won't get personally blamed anyway, and your career will be just fine.

taeric 10y ago
I think you are underselling the upside, to be honest. History is littered with massive successes that are essentially technical debt, as software folks call it. AC/DC power is actually a fun case study in that regard.
- crdb 10y ago
  But the success is not directly inherited from technical debt. Technical debt bought time that enabled the success to happen (maybe before the company ran out of money, or allowing it to launch months ahead of the competition), but the company would not have failed if you somehow built it "properly" and otherwise met those constraints. In other words, you can rationally make the decision to take on technical debt if it allows you to meet those constraints. It isn't a black and white decision. It seems obvious to say this, but I know plenty of founders and investors who have had success (survivorship bias - if they hadn't they wouldn't be investors/founders) with the technical-debt-and-grow method and therefore apply it to every problem.
  - taeric 10y ago
    Any way you formulate this, it is entirely possible that taking on technical debt is required for a largely unbounded success. It may be a couple of steps removed, but it is still a direct line. Time to market is a vital metric for everyone. Anything that can help hit a tight time to market can add to the success of a company. Can you reformulate it so that time to market was irrelevant for success? Only if you are comfortable with what is likely a bad model.
    - crdb 10y ago
      > it is entirely possible taking on technical debt is required for a largely unbounded success > Time to market is a vital metric for everyone I disagree with the first statement (I know plenty of exceptions, enough to statistically consider that it is false) and disagree with what you imply with the second. Google launched against 5-6 strong, established search companies. Copying the then-strategy of paid listings was not going to work, and their technology had to be ready before hitting the market. Theranos is an example where the technical debt did not pay off. Time to market was not as important as getting the tech to work. I had a long meeting/debrief yesterday with a C-level from a freshly failed, large internet group. Their CEO and CTO's strategy to get out of the hole was to technical-debt-and-grow a dozen products in parallel in the hope one sticked; whilst several stuck, they did not have the expertise or willingness to do the work to stop the products from breaking, and the company failed by running out of money (which, due to technical debt stopping the accountants from having any visibility, surprised them all). I consider their failure to be entirely due to the idea that technical debt is required for a large unbounded success, which was like a religion for the CEO and CTO. Had they gone "private equity" (cut headcount, focus on core business, invest time in cleaning up) they might have survived long enough to become profitable again. Many business founders will not have the resources (reputation, money, or even just hustle, EQ and maturity and leadership) to get a good technical co-founder and will have to either take shortcuts, or reconsider their decision to start up without said resources.
      - simula67 10y ago
        I wish this was true, but we can see that it is not. Take a look at successful programming languages. Languages like PHP, Javascript are hugely successful, despite universally acknowledged to be terribly designed. In open source world, despite having very poor reputation for code quality, projects like Wordpress, MySQL are more successful over supposedly well written projects like Postgres. One exception to the rule is Perl, which lost out to Python as the de facto scripting language over time ( Python is supposedly better designed that Perl 5 ). But these are exceptions, not the rule.
      - taeric 10y ago
        You are shifting my claim from it being a possibly necessary criteria, to it being the sole criteria. Worse, you are shifting my claim to be that technical debt somehow guarantees success. Neither of these are my assertion. I simply assert that time to market is a vital metric. If hitting a vital time to market means making some tradeoffs (what we now call technical debt) then, so be it. Take your examples, do you really think that Google did not make some tradeoffs? Having seen some of their products (I'm looking squarely at the pieces of crap that were my early phones from them...), I can confidently say they make rash decisions all of the time. Now, there is a silly double speak that we have in the industry where we say "technical debt" when we really mean just poor work. There is a lot of conflation in the world where these two should not be mixed.
throwawaymsft 10y ago
The max risk is known when selling a put. If I sell a put for 100 shares of Apple at $95, the most I can lose is 9500 (minus the premium I earned).
- crdb 10y ago
  The value of the option will rise with volatility. It is more apparent if you delta hedge leaving you with a net gamma position (i.e. hoping for quieter or more volatile markets depending on whether you are short or long gamma). Selling an option puts you in a short gamma position whether it is a put or a call. The subtlety is that volatility falls slowly as prices rise AND rises much faster as prices fall. So (equity) options become much more valuable when things go badly. Check the S&P500 vs VIX and watch how the VIX explodes upwards with each market correction then slowly drops back as prices rise. The metaphor can only go so far. He does not specify the underlying in the article but the mechanics described imply the company's health. If the bet is correct, the company will do well and "volatility will fall" making the option less valuable. You could say the impact of the damage made by technical debt is less important because you have more resources to deal with it (this is how spaghetti ball codebases start, but in the medium term it holds). On the other hand, if the company does badly (fundraise fails, product does not grow as expected) the relatively small payoff from technical debt is exponentially more expensive and might well wipe out the tech side or slow down development enough to allow the competition to win faster. This is why I say the damage is "potentially infinite" (where infinite is used colloquially rather than formally). In particular, an unhealthy company with a lot of technical debt will rapidly see its top technical talent bleed and find it hard to hire (I'm not theorising - I've many times heard developers who interviewed at well known places tell me afterwards "I liked the pay, the people and the brand, but the codebase was a mess and life is only so long"). Thus the damage done is rapidly exponentially higher than the reward (traders will refer to "convexity" or non-linearity in the model, convexity being the degree of curvature) throwing you in a death spiral. You can even fit in the volatility smile: as more experienced developers ("the market") have in aggregate picked up on the convexity of the technical debt trade, they are more reluctant to take it on the more improbable the payoff is - that is, they compensate for the kurtosis of the return distribution (which is why buying deep out of the money options all the time hoping for 2008 to happen is a bad strategy). I recommend Nassim Taleb's Dynamic Hedging which despite the dry title explains these ideas quite intuitively.

by crdb 10y ago

taeric 10y ago

I think you are underselling the upside, to be honest. History is littered with massive successes that are essentially technical debt, as software folks call it. AC/DC power is actually a fun case study in that regard.

crdb 10y ago
But the success is not directly inherited from technical debt. Technical debt bought time that enabled the success to happen (maybe before the company ran out of money, or allowing it to launch months ahead of the competition), but the company would not have failed if you somehow built it "properly" and otherwise met those constraints. In other words, you can rationally make the decision to take on technical debt if it allows you to meet those constraints. It isn't a black and white decision. It seems obvious to say this, but I know plenty of founders and investors who have had success (survivorship bias - if they hadn't they wouldn't be investors/founders) with the technical-debt-and-grow method and therefore apply it to every problem.
- taeric 10y ago
  Any way you formulate this, it is entirely possible that taking on technical debt is required for a largely unbounded success. It may be a couple of steps removed, but it is still a direct line. Time to market is a vital metric for everyone. Anything that can help hit a tight time to market can add to the success of a company. Can you reformulate it so that time to market was irrelevant for success? Only if you are comfortable with what is likely a bad model.
  - crdb 10y ago
    > it is entirely possible taking on technical debt is required for a largely unbounded success > Time to market is a vital metric for everyone I disagree with the first statement (I know plenty of exceptions, enough to statistically consider that it is false) and disagree with what you imply with the second. Google launched against 5-6 strong, established search companies. Copying the then-strategy of paid listings was not going to work, and their technology had to be ready before hitting the market. Theranos is an example where the technical debt did not pay off. Time to market was not as important as getting the tech to work. I had a long meeting/debrief yesterday with a C-level from a freshly failed, large internet group. Their CEO and CTO's strategy to get out of the hole was to technical-debt-and-grow a dozen products in parallel in the hope one sticked; whilst several stuck, they did not have the expertise or willingness to do the work to stop the products from breaking, and the company failed by running out of money (which, due to technical debt stopping the accountants from having any visibility, surprised them all). I consider their failure to be entirely due to the idea that technical debt is required for a large unbounded success, which was like a religion for the CEO and CTO. Had they gone "private equity" (cut headcount, focus on core business, invest time in cleaning up) they might have survived long enough to become profitable again. Many business founders will not have the resources (reputation, money, or even just hustle, EQ and maturity and leadership) to get a good technical co-founder and will have to either take shortcuts, or reconsider their decision to start up without said resources.
    - simula67 10y ago
      I wish this was true, but we can see that it is not. Take a look at successful programming languages. Languages like PHP, Javascript are hugely successful, despite universally acknowledged to be terribly designed. In open source world, despite having very poor reputation for code quality, projects like Wordpress, MySQL are more successful over supposedly well written projects like Postgres. One exception to the rule is Perl, which lost out to Python as the de facto scripting language over time ( Python is supposedly better designed that Perl 5 ). But these are exceptions, not the rule.
    - taeric 10y ago
      You are shifting my claim from it being a possibly necessary criteria, to it being the sole criteria. Worse, you are shifting my claim to be that technical debt somehow guarantees success. Neither of these are my assertion. I simply assert that time to market is a vital metric. If hitting a vital time to market means making some tradeoffs (what we now call technical debt) then, so be it. Take your examples, do you really think that Google did not make some tradeoffs? Having seen some of their products (I'm looking squarely at the pieces of crap that were my early phones from them...), I can confidently say they make rash decisions all of the time. Now, there is a silly double speak that we have in the industry where we say "technical debt" when we really mean just poor work. There is a lot of conflation in the world where these two should not be mixed.

throwawaymsft 10y ago

The max risk is known when selling a put. If I sell a put for 100 shares of Apple at $95, the most I can lose is 9500 (minus the premium I earned).

crdb 10y ago
The value of the option will rise with volatility. It is more apparent if you delta hedge leaving you with a net gamma position (i.e. hoping for quieter or more volatile markets depending on whether you are short or long gamma). Selling an option puts you in a short gamma position whether it is a put or a call. The subtlety is that volatility falls slowly as prices rise AND rises much faster as prices fall. So (equity) options become much more valuable when things go badly. Check the S&P500 vs VIX and watch how the VIX explodes upwards with each market correction then slowly drops back as prices rise. The metaphor can only go so far. He does not specify the underlying in the article but the mechanics described imply the company's health. If the bet is correct, the company will do well and "volatility will fall" making the option less valuable. You could say the impact of the damage made by technical debt is less important because you have more resources to deal with it (this is how spaghetti ball codebases start, but in the medium term it holds). On the other hand, if the company does badly (fundraise fails, product does not grow as expected) the relatively small payoff from technical debt is exponentially more expensive and might well wipe out the tech side or slow down development enough to allow the competition to win faster. This is why I say the damage is "potentially infinite" (where infinite is used colloquially rather than formally). In particular, an unhealthy company with a lot of technical debt will rapidly see its top technical talent bleed and find it hard to hire (I'm not theorising - I've many times heard developers who interviewed at well known places tell me afterwards "I liked the pay, the people and the brand, but the codebase was a mess and life is only so long"). Thus the damage done is rapidly exponentially higher than the reward (traders will refer to "convexity" or non-linearity in the model, convexity being the degree of curvature) throwing you in a death spiral. You can even fit in the volatility smile: as more experienced developers ("the market") have in aggregate picked up on the convexity of the technical debt trade, they are more reluctant to take it on the more improbable the payoff is - that is, they compensate for the kurtosis of the return distribution (which is why buying deep out of the money options all the time hoping for 2008 to happen is a bad strategy). I recommend Nassim Taleb's Dynamic Hedging which despite the dry title explains these ideas quite intuitively.