Sep

8

This book is an enjoyable compilation of studies that are so dense with fruitful analogous studies it is hard to share them all. The book is Behavioral Mechanisms in Evolutionary Ecology Published by University Of Chicago Press.

There is an interesting study in the book involving benefit optimization in birds' foraging behaviors relative to varying probabilities of success in various patches that are foraged in. Which is evolutionarily optimal: the benefit maximizers, the imitators, or the do nothings?

Also there is an interesting one about how to respond to signals when there is a varying probabilities of correct interpretation and/or response (studying frogs). I'm skeptical of the field studies, but the models and reasoning for them is nevertheless insightful and speaks to any one who has a love of economic thinking.

Dylan Distasio writes: 

Here is an interesting article about pigeon behavior:

And here is the abstract of the study: 

Whereas humans are risk averse for monetary gains, other animals can be risk seeking for food rewards, especially when faced with variable delays or under significant deprivation. A key difference between these findings is that humans are often explicitly told about the risky options, whereas non-human animals must learn about them from their own experience. We tested pigeons (Columba livia) and humans in formally identical choice tasks where all outcomes were learned from experience. Both species were more risk seeking for larger rewards than for smaller ones. The data suggest that the largest and smallest rewards experienced are overweighted in risky choice. This observed bias towards extreme outcomes represents a key step towards a consilience of these two disparate literatures, identifying common features that drive risky choice across phyla.

Orson Terrill comments: 

"Pigeons and humans showed remarkably similar patterns of risky choice, with both species showing risk aversion for low-value rewards and a tendency towards risk seeking for high-value rewards."

Is what underlies the strategy of acquiring deep in the money long dated calls in speculative stocks (SolarCity, Tesla…) and selling nearest dated calls in those same stocks essentially dealing to self selecting risk seekers paying the highest premium? Often it looks reasonable to get back your principle within the first year, and then another 6 -12 months of risk premium as income. The reserve requirements and added costs of frequent options exercises to see how much the return is reduced by those could be a deal killer…

Carder Dimitroff asks: 

How do you do this profitably for SCTY? How deep and how long?

anonymous comments: 

There are experts here that can answer this better; I don't have the real answer. This is in the context of the thread…. trying to deal to the most risk seeking individuals. The idea is to make it as much as like a covered call portfolio as much as possible, but reduce the cost of owning the shares by owning a deep in the money long dated call, with the minimum volatility premium, and subject to the belief that the income from selling near dated volatility can repay you over the duration of the longer dated call. This would suggest the longest dated possible, and probably a strike around half of the share price.

As an example: last week the cost of the 40 strike Jan 16 calls relative to the cost of the 70 Sept 12 calls. Would have put you at ~4% gross for the first week. It's not hard to imagine that after slippage, spreads, and transaction costs that it is possible to recover the cost of the long dated call in ~70 more weeks of selling nearest dated calls. However adding how much, and what, are the portfolio opportunity costs from needing to deliver on those short dated calls sold, and tax issues, make it look iffy at first blush…but it seems like there could be something there.

Even now there might be a $170 credit on selling 12 days (weekends are real) of upside risk from the Sept 20 calls against the the $3500 cost of the 40 strike in Jan 2016. Then you have to repeat the near dated selling; if you brought in $170 on ~21 of the 41 12-day periods leading up to Jan 2016 there would be a break even (gross). That seems like that is a large enough cushion to consider what may be left after taking the total portfolio approach to mitigate taxation, spreads, commission costs, and what return that is against the all the assets involved to implement…


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