Understanding Optionality, an Ancient Philosopher, and Olive Oil
Understanding Optionality, an Ancient Philosopher, and Olive Oil by Adem Tumerkan – Palisade Research
For the second-part of our Palisade Strategy & Fundamental Series – I’m going to go over important tools that speculators can use to maximize reward while limiting risk (if you haven’t read Part One – you can do so here)
Above all else – as speculators – we need practical theories and practical ways to apply it towards our investing.
Think of it as if you have a ‘mental toolbox’. And the more you learn – the more important theories, frameworks, and strategies you have to use.
Soon – after building up a strong toolbox – you can then stack these tools you’ve gathered and create your own investing frameworks.
All this is why I’m going to add this key concept to your ‘mental toolbox’. . .
That is: Make Sure To Always Find the Favorable Optionality.
What does this mean? Well just as the word optional means – it’s something that’s not mandatory.
The dictionary describes it this way: Optional – left to one’s choice; not required or mandatory.
For example – paying your car insurance is optional. You don’t have to do it. But it’s probably a good idea if you do. By paying small monthly premiums, you’re financially protected from a sudden rare event (a car accident) that could end up costing you a fortune.
Another example – buying stock options. You can always exercise the option contract if you want – but never have to.
So what’s Favorable Optionality?
This means finding optional situations that offer you significant upside with little-to-zero risk/costs – meaning the reward far outweighs the small risks.. . .
And Unfavorable Optionality?
This is the exact opposite – this is finding situations that offer you significant risk/costs with little-to-zero upside – meaning the risks far outweigh the small rewards. . .
Using the car insurance example again – I make small monthly payments for the right – but not the obligation – to call upon my insurer if something happens to my car or myself.
If I get rear-ended and my tail light busts – I can check if I would rather pay out-of-pocket. Or instead call my insurance company and have them fix it if the damage is too much.
It’s important to realize that I have the option to call my insurer. I don’t have to – but I can if it’s too expensive.
And one thing I’ve learned in life is that having multiple options is always better.
You can visualize Favorable Optionality like this. . .
One of my favorite examples of optionality is the epic tale of Thales and his Olive Presses. . .
We first learn of Thales Miletus – a philosopher and the ‘father of geometry’ – from Aristotle’s book, Politics.
We know that Thales lived during 600 B.C. and was an aspiring philosopher. But – of course – was mocked for his uselessness and poverty.