- Noel Smith & Leo Capalleja
The Tesseract and the Benefits of Options
Options, like the tesseract, add dimensions to our otherwise flat and binary investing world of price up, price down.
Most investors are stuck in the world of price up, price down or flat. This one-dimensional perspective limits opportunities and obscures potential risks. Options add the dimensions of volatility and time, vastly expanding the landscape of profitable opportunities and shedding light on otherwise invisible risks.
What is a Tesseract?
A tesseract is the four-dimensional equivalent of a cube. It is to a cube what a cube is to a square (and what a square is to a line). It acts as a metaphor as to why we trade options instead of just price. Options, like the tesseract, add dimensions to our otherwise one-dimensional investing world of price up, price down or flat.
Time and Volatility
Time and volatility are additional dimensions of opportunity that are made available through trading options. With these dimensions we can express more nuanced investment theses and see more than people stuck in the flat world of price.
Through volatility, we can profit from price movement irrespective of direction. When there are extended periods without price movement and everyone else is treading water, we can use options to profit from the passage of time. Through both time and volatility, we can profit from knowing which events (e.g. earnings, economic reports, etc.) will be impactful and which won't.
Lastly, by continuously analyzing activity in the options markets, we gain a higher-dimensional understanding of the market's future expectations. This insight is then used to both identify where potential risks may lie and to manage those risks more effectively.
By adding two additional dimensions of time and volatility, options are to the price world what tesseracts are to 2D squares. In properly harnessing their complexity we break the dependence on price to generate profit. For price-only investors, adding options to their universe vastly opens the possibilities for additional profits.