Taking the GMAT – A “Call Option” On Your Future Career

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Not sure about taking the GMAT? Not sure about Business School?

It’s still worth it to take the GMAT exam – according to our guest author today.

Aspiring career professionals often look to business school to change careers for a better job/pay, or to climb the corporate ladder. But to get to business school, the first step is to schedule a date and take the GMAT exam. But what if you’re not sure about going to business school? Does it still make sense to take the GMAT?

Today, we’ll hear that the answer to that question, after some expert trading risk analysis, is an emphatic “yes”. Our guest author is Mikey, a 25 year old derivatives trader at an investment bank, with 4+ years of work experience. He likens the GMAT exam to a very “cheap” option on his future career – in trading terms, a low risk premium paid ($250 exam fee) for a potentially large reward (the MBA experience, degree, and opportunity for career progression). For any trader, this could very well be the trade of a life time.

The Case for taking the GMAT Exam: Finance Professional

This is NOT an article about the case for business school — that in my view is an entirely separate consideration. This is strictly about my thought process in deciding whether or not one should take the GMAT exam.

I believe that one can think of the GMAT exam as a long-term call option on one’s career — and ultimately on one’s life — whose main costs are sweat equity and the examination fee ($250). I believe that the prudent thing to do is to maximize these sort of “limited downside but potentially life-altering upside” options, especially in this kind of uncertain job market environment and when one is young.

Introducing the Financial Call Option

In the financial services industry, an option is a type of product that costs the buyer an upfront fee and provides him/her with a payoff that is linked to the performance of a pre-specified underlying entity. A call option rises in value when the underlying entity increases in value; a put option rises in value when the underlying entity decreases in value.

When one considers options, one weighs the “costs” versus the potential “payoffs”.

An interesting aspect of the options world is the potentially asymmetric payoff profiles that may arise: a call option costs a fixed, pre-determined amount…

..BUT the payoff is theoretically UNLIMITED as the underlying entity can continue to rise infinitely in value.

But let’s be real, the infinite payoff scenario is highly unlikely to occur. Instead, one should weigh (based on probability) the various potential payoff scenarios and net that against the cost of the option to come up with an expected value for the option.

GMAT As Career Call Option

How does a “call option” relate to the GMAT exam and your career?

The underlying entity is your career.

The option premium is the cost of the exam ($250) and the time required to study for the exam.

The potential upside is infinite.
The downside is limited to the cost of the option.

In my view, the GMAT exam is an extremely low-cost option that can potentially have positive career and life altering impacts.

Should I Buy A Career Call Option?

Ask yourself this question: Is there a small chance that you may consider going to business school in the next 1 – 5 years?

If your answer is yes, then I would argue that as a trade, the risk vs. reward / cost vs. benefit profile seem to be skewed in favor of taking the exam.

If you answer no, I would still argue that it may make sense to strongly consider taking the GMAT as a sort of “tail-risk” hedge, given how relatively low-cost this option is to acquire.

Think about it this way: Options can be used both as a speculative instrument (betting that the value of an underlying asset will go up or down), but also as an insurance or hedging instrument (protecting against the downside of an existing investment). Applied to the GMAT, there are three scenarios here:

  1. If you already know that you are going to apply to business school in hopes of a better career, then it is obvious that you need to take the GMAT exam in order to apply.
  2. If there is a small chance that you may want to apply to business school sometime in the future, then it makes sense to take the GMAT exam as a sort of cheap insurance policy.
  3. If there is no foreseeable plan of business school on the horizon, it still makes sense to take the GMAT exam as a sort of tail-risk disaster hedge option that becomes valuable if you find yourself in the situation of “no job, no job prospects” and “only business school as the next best logical step”.

As a trader risk-managing a book, I always think of the worst-case scenarios: What happens if the world blows up? How can I protect the downside of my book?

Protect Your Career Now – Not When You’re In Trouble

Oftentimes, it is exactly when the world is in a pleasant state that these “disaster options” that increase in value in stressed times are cheapest to purchase — everyone thinks all is good in the world and so the market puts little value on these kinds of disaster payoff options.

But as we have seen, tail risks seem to occur more frequently than expected in today’s world.

The WORST thing I could do is manage my trading book assuming the world will always be in a pleasant state. When the world blows up, then I would have to scramble to purchase these “disaster payoff options” when everyone else wants to buy them too.

But by this time, it may be too late: either I may have suffered such great losses on my original position that I am out of a job


these options are so expensive that it does not make sense to purchase them at such rich levels.

Similarly, it MAY be the case that the best time to take the GMAT is NOT when you are out of a job and scrambling to figure out if you have enough time to apply for business school, BUT RATHER when things are seemingly going well and business school is but an afterthought.

“The best time to take the GMAT is NOT when you are out of a job…but rather when things are seemingly going well…”

Life Can Change Quickly

Life can change quickly. Things may be perfect for you now, but as anyone in his or her 20s and older has seen (and perhaps even experienced first-hand), the world in general (and whole industries in particular) can experience systemic changes in a matter of months.

It has been remarkable to me to see that the financial services industry that I have worked in for half a decade has changed so dramatically. We have lived through the collapse of once seemingly indestructible investment banks; we have seen the stock market lose half of its value; we have experienced one of the worst economic and job environments in a generation.

I have seen colleagues get “let go” from jobs that they previously have devoted their lives to; I have seen close friends unable to find work after graduation; I have and still continue to experience significant job uncertainty.

“I have seen colleagues get “let go” from jobs that they previously devoted their entire lives to.”

–Mikey- Derivatives trader, Bulge Bracket IBank

Be Prepared For Your Future Career

The recovery process is slow. Companies are slow to rehire. There may come a point at which you and I find ourselves with no job and no other immediate job prospects. It is at this point that we have no other options and may need to consider business school.

Having already taken the GMAT puts us in a significantly more favorable position to pursue this option.

About the author:

The author is a derivatives trader at a bulge bracket investment bank in New York. He has worked in the financial services industry for five years. In his spare time, he likes to ride and write about his folding bicycle: www.bromptonyc.com.

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