Hey Traders,

I had déjà vu this week.

But the powerful kind. The kind where something clicks and your whole frame of reference shifts.

I was using AI combined with Bloomberg to run an analysis on the smoke coming from the private credit markets.

Trying to figure out the potential for contagion, how big the impact might be. Most importantly, what are the signals to get short, what products to get short, what are the signals to cover, and then flip to long. I’m not a private credit guy. This isn’t my background. But the tools available today, the very tool made by Anthropic (Claude) that is disrupting everything, helped me rapidly learn what I needed to put together a game plan.

And I just stopped for a minute. Because I’d felt this before. This exact feeling. The excitement. The disbelief. The little voice saying “this changes everything.”

It was déjà vu. I’d seen this movie before.

The Last Time Everything Changed

When I started trading options on the floor of the AMEX in 2001, the business was splitting in two. The veterans could price options in their heads, guided by paper sheets printed out every hour or so. They’d been doing it for decades. They knew the rhythm of the market the way a musician knows a song.

Then there were the young guys. Us. We came in with computers spitting out theoretical values that changed instantly, updated in real time. We could spot arbitrages they couldn’t see. The old timers managed positions in four or five stocks. We could manage 50, easy.

I remember that feeling. Sitting at my screen thinking: “This is unbelievable. I can do things that were impossible just a couple years ago.” The same wonder I felt this week watching AI plow through PIK data, which tracks when lenders accept IOUs instead of cash payments, and non-accrual loans, the ones where borrowers have stopped paying altogether, across a whole host of BDCs, the publicly traded funds that lend money to middle market private companies. I didn’t even know what half of these terms meant a week ago. AI ran these calculations in minutes. I quickly realized it’s a way to tell if a company like Blue Owl (OWL) is healthy or not. There will be winners and losers in the AI shake up. I want to be positioned accordingly.

Back then, the old timers hated it. “You arrogant kids don’t even know what you’re doing. You’re selling volatility too low. You can’t even price an option without your beloved computer.”

They were cynical. And they weren’t entirely wrong.

Guess the Straddle

I had a mentor, Nick, who saw both sides. He loved the computers. But he refused to let me become dependent on them. So he played a game with me.

We’d pick a random stock, ballpark the volatility based on what little we knew about that company, and he’d say: “What’s the straddle worth?” A straddle is when you buy both a call and a put at the same strike price, essentially betting on how much a stock will move regardless of direction. Then he’d ask: “What’s the 20 delta put?” I’d ballpark Black-Scholes in my head, the formula options traders use to calculate theoretical prices, and come up with a number. Then we’d check the screens.

At first, my markets were embarrassingly wide. But we played it over and over, and I got close. Not as tight as the computer. But close enough.

Nick’s lesson was: “If your computer ever malfunctions, you have to know how to make markets without it.”

But the real lesson was so much bigger. By doing the math manually, I was wiring my brain to understand how the model actually worked. How risk moved. Where the assumptions broke down. When the computer said volatility should be 20 based on a recent look back, but the risk event coming up meant it should be 30, I could feel it was off. That’s not a 10 cent mistake. That’s a dollar. And knowing the difference kept you alive.

That “guess the straddle” game made me a better trader than any screen ever could. Not because the screen wasn’t valuable. Because I understood what the screen was telling me.

The Part Nobody Wants to Hear

That’s what hit me this week. Same story, massive new technology. And I’m grateful I lived through the first version.

These tools make me 10 times more capable than I could be alone. I can stress-test ideas, model scenarios, and synthesize research at a speed that would’ve been science fiction on the floor. I’m building my entire trading process around them. I’m all in.

And that’s exactly when the old lesson matters most.

AI can’t stress-test for scenarios that have never happened before. There’s no training data for the unprecedented. The machine works beautifully within the boundaries of what it’s seen. But if something breaks in a way that has no historical parallel, and you’ve outsourced your thinking instead of sharpening it, you’re going to freeze.

I watched it happen in real time 20 years ago. The young guys who couldn’t think without computers got blown up by the first thing nobody saw coming. The old timers who refused them got left behind. The traders who thrived knew their fundamentals AND used the technology to push further.

Same movie. Same lesson. Better special effects.

The more I know, the smarter questions I can ask the machine. The smarter questions I ask, the better the output. And when the output doesn’t make sense, I’ll know. Because I’ve guessed the straddle.

Know your basics. Use the tools. That’s always been the game. The tools just got incredible.

Trust the process,

Tim

P.S. The spookiest thing happened. As I was writing this email my mentor, Nick, texted me. He wanted to set a time to catch up. It’s been a while. He’s a dear friend, but I haven’t spoken to him in a couple of years. I’m speechless. Some things are too mysterious to make up.