Pitching a trade: thesis, instrument, sizing, risk, catalyst, exit
MKT · Chapter 612 min readAsked at Citadel, Point72, Jane Street, DRW
Assumes Macro: the yield curve, the central bank and the calendar.
After this lesson you should be able to
- Structure a trade idea so every obvious follow-up is already answered.
- Choose the instrument that expresses the view most cleanly.
- State what would make you wrong, and when you would get out.
A trade pitch is scored on completeness, not on being right. Six things have to be there — the view, how you express it, how big, what can go wrong, what makes it happen and when you leave — and a pitch missing any of them invites a question you will answer badly on the spot.
| Part | The question it answers | What a weak pitch does |
|---|---|---|
| Thesis | What do you believe that the market does not? | States a fact everyone knows |
| Instrument | How do you express it most cleanly? | Buys the stock by default |
| Sizing | How much, and why that much? | Has no view on size at all |
| Risk | What kills it, and how much does that cost? | Lists generic risks |
| Catalyst | What makes the market agree, and when? | Has none — the trade is just "cheap" |
| Exit | At what point are you out, right or wrong? | Plans to hold and see |
Proposition 6.2
The thesis must be a variant view
A pitch has to contain something the price does not already reflect. "This company is growing fast" is not a thesis — everyone can read the growth rate, and it is in the multiple. "The market is treating this growth as cyclical when the contract structure makes it recurring" is a thesis, because it names a specific belief that differs from the consensus.
Holds when
- Ask yourself what the person on the other side believes. If you cannot construct their argument, you do not yet understand the trade.
- A view on timing or on volatility is a perfectly good variant view; it does not have to be about direction.
| If your view is | Express it with | Because |
|---|---|---|
| Direction, high conviction | The underlying, or a future | Cheapest and cleanest exposure |
| Direction, defined risk or a date | Options | Caps the loss and puts the view on a clock |
| Relative value | A spread or pair | Removes the market move you have no view on |
| Magnitude, not direction | A straddle, delta-hedged | Isolates volatility from the path |
| Timing of a known event | A calendar spread | Isolates when rather than whether |
Strip out the risks you have no view on. If you believe one retailer will outperform another, buying the first leaves you long the whole sector, the market, and the currency — three exposures you have no opinion about and are not being paid for. Selling the second removes most of them and leaves the view you actually hold. The discipline generalises: the right instrument is the one whose payoff is closest to the thing you believe and as close to flat as possible in everything else.
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