It’s time to set the record straight.
My name is Cynthia and I’m an engineer.
(Greek chorus: Hello, Cynthia.)
Okay, I’ll grant it’s been an awfully long time since I’ve done any true engineering (fixing the ice maker in the refrigerator doesn’t count, does it?) but it’s the way I think and it’s completely colored my trading… though not in the way you’d expect.
I was taking a senior-level class taught by a Nobel-laureate professor, so every pearl of wisdom he wrote on the board we dutifully copied into our notebooks. When it came time for our midterms (40% of our grade), the problem on the exam was one he’d done in class! Since our exams were open-note, open-book (because Life is that way), we happily turned to the right page in our notebooks and copied the answers into our test booklets. I sailed out the door feeling confident I’d aced the exam.
So did everyone else in the class.
Our beloved, exalted professor had *deliberately* made an error when he worked the problem on the board. No, we’re not talking a subtle one, we’re talking a “so easy a first year engineering student could find it” type error. And NONE of us caught it because HE wrote it on the board so it MUST be right, yes?
The lesson – and one that’s served me well over the years – was that no matter what the expert, the software or the model says, you need to understand what you’re looking at well enough to KNOW when it’s not right. You may not know the right answer but you should certainly recognize the wrong one.
The lesson learned was never more useful than this latest round of OptionVue fun. Many people were really frustrated by the change that OptionVue made to their model because it was different and, in many cases, flat wrong. What people forgot, though, was that it’s just a model. It’s NEVER always right. The real problem was they were so used to simply trusting the graph that they’d lost sight of what they were looking at – a mathematical approximation.
I see a lot of beginners struggling through the calculations, trying to understand the different models, the different greeks, IV and delta skew and many other things…all of which are, at their basis, models. NOTHING will tell you how the options will be priced tomorrow. Some models are more accurate during different markets than others and some are more accurate over multiple market conditions but they’re all just models.
The best advice I ever got from John as to how to improve my trading was “Be observant”.
Don’t just look at your model. Look at where your model excels (no pun intended) and where it falls short. Spend more time observing what the market actually DOES instead of what the algorithms predict.
The OptionVue model change, while annoying, didn’t bother me much. I may not always know when the model is RIGHT but I certainly know when it’s WRONG. I’ve never trusted ANY model but I trust myself.
And that’s where I need to set the record straight. I hear the ol’ “Engineers need their spreadsheets and keep trying to get exact numbers” fallacy repeated all too often. And it’s wrong. Very wrong. We LIKE our spreadsheets and calculations because it helps us UNDERSTAND the numbers. (Also because we’re lazy and it’s much faster and easier than doing it by hand.) But we know that sometimes software models have bugs, people make mistakes and trusted sources may be wrong. So we’re trained to sense when it’s wrong.
The flip side is that we can also sense when something is moving in our favor and take advantage of it. There’s a reason that the CBOE recruits heavily from Engineering colleges! Having a feel for the numbers can give you a better success rate when you’re confident enough to move faster (nice during expiration week!), take advantage of patterns, get better pricing and make fewer mistakes.
My husband is fond of saying that the numbers I quickly pull out of, er, my delicate derriere are usually more accurate than most amateur calculations. (And I don’t think it’s because he’s overly fond of that portion of my anatomy though that may play a factor in it.) (Husband Ed.: It does.) It’s because I can, at a minimum, get in the ballpark with an intuitive number (after much training and practice, mind you!) while others are still reaching for their spreadsheets. (FYI, in my mind I’m seeing a High Noon scenario.)
Get that feel. Understand the numbers. Recognize that even wonderfully complex models can be wrong.
And stop picking on engineers.
Written and contributed by Cynthia Sarver
Arunas Skarnulis says
Wonderful piece of advice. Also being an engineer, I can’t agree more. I see so many high educated people struggling with problems, but if you really understand how things work an error is evident!