What can bar bets, coin flips, and the length of your subway commute teach us about options pricing? In this episode of Excess Returns, Matt Ziegler is joined once again by Kris Abdelmessih to break down complex options theory into intuitive, real-world analogies. From prediction markets to probability distributions, Kris helps us understand how the options market reveals what the stock market often hides—how investors are pricing not just if something happens, but how much it matters when it does. This is options math with a twist, taught like you’re five, but ready for Wall Street.
📈 Whether you're an investor trying to size a high-risk, high-reward position, or simply curious about how the market “thinks” about uncertainty, this episode is full of mental models you’ll want to revisit.
📌 Topics Covered:
Coin flips vs. futures: the two dominant styles of betting
Over/under bets and what they teach us about prediction markets
Why odds ≠ probabilities—and how to convert between them
The difference between probability and magnitude in financial outcomes
Bar bets and beer-drinking contests on Wall Street (!?)
Using call spreads to isolate probabilities, not potential profits
A visual breakdown of skewed vs. symmetric return distributions
Why two stocks can have the same price but completely different implications
How the options market understood the dot-com bust better than most investors
Why thinking in bets makes you a better investor and allocator
⏱️ Timestamps:
00:00 – The stock market vs. the options market
01:42 – Over/under bets and their connection to options
05:59 – Understanding prediction markets and odds
10:00 – Future-style bets: Magnitude vs. probability
14:35 – The subway commute example and tail risk
19:00 – Why volatility and skew matter in pricing
20:38 – Stock A vs. Stock B: Same price, different outcomes
24:00 – Visualizing probability distributions
28:00 – How call values reflect both vol and probability
32:00 – Truncating the tail: turning options into “bar bets”
35:00 – Using call spreads to extract implied probabilities
37:00 – What investors can learn from this framework
39:00 – Options markets during the dot-com bubble
40:45 – Where to follow Kris online
🎙️ Guest: Kris Abdelmessih
🧠 Follow Kris’s work: https://moontower.substack.com