Market Wizard Jamie Mai

market wizards

market wizardsI read Jack Schwager’s interview with Jamie Mai from Hedge Fund Market Wizards while I was waiting for new tires to be put on my car. While I didn’t have a lot of other options at the time, it wouldn’t have mattered if I did because I was completely fascinated by Mai’s approach to trading. The way he described some of his past trades made them sound like exciting once-in-a-lifetime adventures. Everything about his approach appealed to my personality, even if some of the options language was a bit advanced for me.

Top Five Quotes From Market Wizards Jamie Mai

As a general observation, markets tend to overdiscount the uncertainty related to identified risks. Conversely, markets tend to underdiscount risks that have not yet been expressly identified. Whenever the market is pointing at something and saying this is a risk to be concerned about, in my experience, most of the time, the risk ends up being not as bad as the market anticipated. – Jamie Mai

My initial thoughts went to Greece from last year and each of the debt ceiling/government shutdown incidents. Then, I realized that this concept also applies at my day job. There are so many times in the restaurant business that what seem to be the most urgent, pressing issues are nonexistent the very next day.

I believe that it is built into our human nature to overreact to current situations, and obviously that nature is reflected in the markets. As traders, we should always be mindful that this tendency towards overreaction is always at work.

Options are priced lowest when recent volatility has been very low. In my experience, however, the single best predictor of future increases of volatility is low historical volatility. When volatility gets very low in a market, we consider that a very interesting time to start looking for ways to get long volatility, both because volatility is very cheap in an absolute sense and because the market certainty and complacency reflected by low volatility often implies and above-average probability of increased future volatility. – Jamie Mai

This is kind of a derivative of Mai’s point about markets tending to overreact. Basically, whatever is happening today is not likely to happen forever. If things are at all time extremes, they are bound to revert back eventually.

This got me thinking about the relationship between trend following and mean reversion. Has anyone written an interesting work comparing the two or analyzing how they could be used in conjunction with each other?

Our trades range widely in probability of payoff, but they all share the characteristic of being priced cheaply relative to the perceived probability and magnitude of a win. – Jamie Mai

It is interesting to see that Mai is still very concerned with evaluating risk, he just does it very differently than most of his competitors. I could not get enough of wrapping my brain around the way that he seems to think about things in a very different way from the average fund manager. I bet he would be a very interesting person to spend a weekend talking to.

Option math works a lot better over short intervals. Once you extend the time horizon, all sorts of exogenous variables are introduced that can throw a wrench into the option-pricing model. – Jamie Mai

The simple way that Mai is looking at options over a longer time span than most people who trade them is a great example of how he thinks about the world differently than his competitors. I doubt I will ever have the financial backing or resources to trade in Mai’s style, but just reading about his trading really got me thinking a little more outside-the-box.