Wednesday, May 26, 2010

Gaming the System

I have a surefire way to beat the computer at chess - I make very convaluted moves that eats away at the computer's clock and then i win on time. (granted this strategy only works if you play timed games - I play with sigma chess.

This sort of win never feels satisfying. It feels like I cheated, like my win was not really a win. However, it is a win. I am using the computer's strength (reliance on search algorithms) against it. Were I playing a human, these moves would probably signal amaturish play and I would be swiftly beaten as my opponent changes gears and uses a different strategy (the strategy that defeats idiosyncratic chess players).

Winning is not a matter of degree it is a binary attribute. Either you win or you dont. You can have a better win. We may talk about perhaps a better win, a more elegant win, or a win with more points or something like that - but really these are just language games. You either win or you lose - everything else is superfluous to winning-ness. Winning is achieving something over another person according to certain rules.

So are there winners in life? In this I always think of Alan Watts - life is not a game where to goal is to get from a to b, but a dance or a symphony - and a dance or symphony really has no goal other to experience it. Winning only makes sense in a situation where there are rules - does life have rules? Life is just about existence.

I have been thinking about this idea of winningness in regards to one of the options strategies I trade. I have a few strategies that I use in different market conditions, but let me talk about one strategy where I trade various mean reverting stocks and try and anticipate pin action (pin action describes where the stock will end on options expriy day so that the most option holders to lose money). My algorithms are generally good at anticipating the pin, however they are bad at market timing (which means i have to deal with market to market loses sometimes until options expiry day which reduces my buying power)

In any case - I often feel like 'I win' when I successfully guess the pin and make money on my options (and dont have to deal with mark to market losses anymore) But is this really a win? For example, let me use aapl (which I dont use for my options strategy anymore but I used to) if I sell an aapl put (aapl is at 250) - 250 for $7 and my algorithm thinks the pin will be 250 than that $7 will go to $0 theoretically or probably $1.50. I will make $5.50. However in that time aapl may go down to 240 - that put will go up 10 bucks and I will carry a mark to market loss of $10. Now do I buy back the put as it goes down (for a loss) and then sell it again when it bottoms out (for more money)? Do I average in more puts when the cost goes up? Sometimes it pays to close out for a small loss and then get back in at a better price. Does this mean you lose?

Or for example - say if aapl 260 calls are $6. You can sell them and if aapl hangs out at 250 for a few days or even goes down, those may go down to $4. Should you buy them back then, as aapl will probably shoot back up above 250. and those calls may go to $7 (mark to market loses again). My pin algorithm says aapl will go to 250 so they will end up being probably 1.00, but you will have to deal with the mark to market losses

In any case - a win is not necessarily just picking the correct pin. The correct pin is like the perfect chess game. A noble ambition -but you dont need it to win, and it may end up hurting your game.

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