I think L1-L2 architecture is good analogy and should be pursued. I was taking Elie Ayache’s argument too seriously—it’s true that L2s could become L1s, but L1s and L2s both exist. By definition, L2s (e.g., derivative market) are dependent on L1s (e.g., the underlying market). The free market force will coordinate the size of L2 if it gets too big, similar to how the triad will be aligned within free market society. It can stay too big only because it’s dependent on nation state networks. Li Lu’s emphasis of the Iron Law of Civilization 3.0 should be interpreted in this context—i.e., you must know where the L1s are, and acknowledge L2s’ dependency on them. Remembering this dependency is the difference between localization and fragmentation—we should strive for the former, but never the latter. The tricky part, which is related with #5 above, is that coercive network tends to intervene such local development. Li Lu’s emphasis on real wealth is understandable in this context—if the L2s you belong see themselves as L1s, they will take coercive measure to lock-in the participants (e.g., via taxation).
- The Coastal Journal on Gamma Squeeze (20251017)revisit
- The core thesis: markets no longer move on conviction. They pulse mechanically. Traders have been buying short-dated call options — mainly on Nvidia and Tesla — at record pace. Each new call purchased forces dealer desks (Citadel, Jane Street, Goldman Sachs) to buy stock to hedge their exposure, which pushes prices higher, which triggers more call buying. This self-reinforcing loop works beautifully — until the flows reverse.
- The critical insight: almost no one actually wants to own the underlying shares. The entire run-up was fueled by short-term options mechanics, not genuine accumulation. So when prices fall, there’s no real bid underneath — the demand was synthetic. That’s why gamma squeezes inflate fast and deflate even faster — prices fall through “air pockets” that didn’t exist in traditional markets.
- The author’s verdict: the entire April-through-September rally was built on a gamma squeeze bubble, not investor conviction, and for the first time all year, professional money managers are hedging against its collapse.
- The author recommends: de-risk and rebalance away from high-beta tech (which is effectively leveraged to options flows); avoid margin leverage (a -5% dip can snowball into -25% in a day through mechanical hedging); seek conviction assets like gold and silver (up roughly 60% YTD, rising on genuine demand, not gamma loops); and revisit a bond barbell strategy (mixing short- and long-duration bonds has delivered equity-like returns with no drawdown in 2025).
- The closing warning: “Markets built on options don’t drift lower. They crash.”
- <> my note on the derivative market size above
Challenging: