The price of deferred maintenance
Vol #270: April 23rd, 2026
The Interborough Rapid Transit Company held the base fare for the subway system at five cents from 1904 through 1948.
Two World Wars. A Great Depression. Consumer prices roughly quadrupled during this period. And while the stock market had not yet reclaimed its 1929 peak, it was more than double the starting level.
In real terms that nickel from 1904 was closer to a penny by 1948, and though ridership steadily increased, the unit economics here were destructive. The primary cost centers of labor and electricity were exploding while revenue stayed flat.
If you think the current MTA is a cash quagmire, at launch the IRT was privately owned, and the investors also expected dividends. Transportation stocks were popular early in the century, but the 1929 crash laid bare the flaws in this system and investors fled the sector completely. Ultimately New York City was forced to take over a crumbling system in 1940.
Raising fares was politically and legally untenable. A nickel for the subway was not only the expectation, it was baked into the ninety nine year land lease the companies were granted upon construction. So the IRT was forced into other cost saving measures. Mainly deferred maintenance.
Wooden and steel cars ran long past their lifetime, and the worn out suspensions and flattened wheels slowly raised the volume underground. Ornate tile work, brass fixtures, even skylights of the post Victorian era were abandoned, and nature took over. Ground water rich with salts leaked in, forming the stalactites that are still visible today.
Technology advanced in leaps and bounds over these four decades, but the IRT couldn’t afford to keep up. The company operated its own massive power station at 59th street, but this was coal fired and wildly inefficient. The labor intensive system was not only expensive, it was prone to blackouts.
The long decline of the IRT was a slow moving train wreck. It was obvious to everyone what was happening, but inflexibility and stubbornness let this persist another day. New Yorkers started preferring cars and buses, and the death spiral continued.
When the system was brand new and riders were just getting used to barreling through underground tunnels, fare hikes would have likely stymied the initial growth. But by 1940 it was clearly too late. So when is the right time to raise prices?
Not every up or down tick in commodity input prices is an excuse to change your retail prices. Other than gas stations and heating oil, most businesses will buffer their back end costs so the consumer sees a fixed price. Inventory and labor management are all part of the margins they build in.
With actively traded securities, the question is not much different. The fact that options prices are rapidly moving every single day is a canard. What they’re really pricing - liquidity - moves on a much slower arc.
Options 101 teaches you that when you buy a call, you are purchasing the right to buy the underlying stock at a fixed price, on or before a certain date in the future. The value of that right is highly correlated to the price of the stock for very obvious reasons. Stock goes up - calls go up, puts go down.
That’s a purely mechanical relationship. There’s almost nothing subjective about what Microsoft stock is valued at, or how the ebbs and flows will affect the 3606 calls and puts listed there today. But basic stock movement isn’t really changing the price of that option.
If you know enough to be dangerous, you’ll tsk tsk and ask about spot:vol correlation. What an option is ahk-tually pricing is implied volatility. Underlying moves are but one dimension of the overall price, and the future expectation of movement (or lack thereof) contributes all the extrinsic value. If there was zero expectation of stock movement, the option would be worth its settlement price today.
Supply and demand push implied volatility around. Preferences for calls or puts at given strikes shifts the skew curve and relationship between different strikes at the same expiration. More sophisticated pricing models start to make assumptions about how if stock goes down, implied volatility is also likely increasing, and your downside pricing should reflect that.
Implied volatility and skew absolutely need to be repriced. So do interest rates. As the market digests new information through orderflow and trading activity, the price of options will also adjust. This is not done by a cabal of dealer price setters, but an entire ecosystem of shifting and trading.
While a good liquidity provider is aware of what constitutes high and low volatility for a given underlying, that is not the primary pricing lever they are adjusting. A good manager of inventory is constantly evaluating the spread they are charging to assume their next randomly assigned position.
In a highly competitive market that is trading tens of millions of contracts every day, the basic components are very well priced. Volatility risk premium has declined steadily over the years, and only tends to pop when we have idiosyncratic events. Prices shift quickly back into line.
If the institutional side of the market is rapidly and efficiently adjusting the fair value of an option, what prices should a buy side customer be focused on?
Starting with the assumption that the option value is good, the active trader or portfolio manager needs to evaluate a different dimension of costs and revenues.
For strategies that are built on backtests, it’s extremely important to continue to test the assumptions. Is the signal still valid? How does a changing volatility regime impact this? Because the answers to this don’t immediately shift day over day, it’s easy to let it fall into the deferred maintenance category.
No matter where your position comes from, every little cost is going to be fighting your potential returns. Fees, borrows, etc of course, but also the implicit cost to maintain that.
Everything looks clean when you have a trading formula that rebalances at X or Y level, and hedges when deltas exceed Z. But the reality is that many, if not most, traders fail to stick to their guns and stay disciplined. The deltas that slipped through because you weren’t at your desk. The covered call that expired on Friday because you were out golfing.
The most serious threat to an options portfolio is deferred maintenance. Over time the little mistakes compound. The steady nickel that comes in every time is masking what happens under the surface with missed opportunities, errors, and fees.
Price is the most important part of a trade - at the surface level it’s the only determining factor in your PnL. But overtime it’s the cost of maintenance and upkeep that really impact long term performance.