A thought as we approach year end bonus season in a year that will have had some big winners across different strategies.

A buddy at a prop shop told me of some measures their employer suddenly imposed (as in this month, right before payouts).

I'm not going to describe the measures but let's just say, if you worked there you'd be pissed.

This is a cold reminder that you should "not confuse contracts for power"

If you are an employee, decompose your exposure as you would a portfolio.

An employee is exposed to:

a) own idiosyncratic performance
b) diversified performance of their group/firm/industry

Let's think about what this means.

First, in the spirit of "nobody is bigger than the market" let's assume your performance is not towards an extreme.

If it is poor, you're getting winsorized anyway. GL.

If you are an upside outlier, we'll return to you in a bit.

Ok so you're in the middle of the employee mosh pit. Maybe even a badass hocked up on Ripped Fuel (you still have a supply from 1999)

What's your position?

You are long a call spread and short an OTM put. If your firm performs badly enough you are out of a job regardless of your solid performance.

This put is likely far OTM as long as the economy is ok (ie macro corrs are not elevated. Yes the portfolio metaphor can be abstracted)

If the firm does well you have some delta to that but the upside is eventually capped as a non-owner. Your immediate downside is also protected. A below avg year and you still get your salary. Your firm can tolerate some volatility.

Diversification helps you.

In terms of Greeks, you are locally long vega. As uncertainty increases having the job is worth more because the protection is worth more.

But if this is boomtown, your exposure to upside vol goes away...

Uh oh.

Here's how diversification hurts you...

You are in a sector. If your firm crushes it, your value remains tied to your replacement value -- another strong candidate at a firm who didn't crush it.

In option terms...

You are short a call struck at the typical (or lets be generous, high end) pay of an equivalent performer in your industry plus maybe some inconvenience premium for your employer to piss you off.

It is well understood that a trader's seat is a call option (see Dynamic Hedging) and they should want to ramp the vol, while the owner of a firm will care more about survival.

Owners can clip that call. This is what my buddy discovered. A comp deal is not equity.

Shadow equity (ie you are entitled to X% of firm take) is also not the same as ownership unless your interest is literally something you can sell back to other owners.

Otherwise it's just a promise.

(It's subject to legal interpretation and that's another rabbit hole.)

But it is a good reminder that the location of your strikes and your greeks are dictated by your bargaining position.

This position is compromised whenever you are part of a reference class, employee pool, or job description.

The only insurance against that:

The Steve Martin quote: "Be so good they can't ignore you"

Or you can become an owner. Both of these strategies have their own costs.

Don't be so naive that you think your position is what someone else told you it is.

It's on you to know your greeks and how they behave.