Markup

Bob sold 40% of himself at 1.15 and the buyer texted back "lol too high." Bob asked Tau what a fair number even means. Tau told him to come to the taquería.

Bob slid into the booth. The waiter drifted over with the combo menu. Tau didn't look up.

Uncle Tau: Next time, maybe.

Bob: What about next time?

Uncle Tau: Not you. The combo.

Bob: Right. OK. I sold 40% of a thousand-dollar event at 1.15 and the guy buying it said I was trying to rob him. What is markup, even. Like, what is that number.

Uncle Tau: Markup is the premium on your action. Face value is what your seat costs. 1.15 means the buyer is paying 15% more than face to own a piece of you. For every dollar of your tournament they're buying, they hand over $1.15.

Bob: OK so it's a tax on the buyer. Cool. Why would they pay it?

Uncle Tau: Because if you're a winning player, a dollar of your seat is worth more than a dollar. It has positive expected value in the tournament. So the price to own a piece of it should be above face, not at it.

Bob: How much above?

Uncle Tau: Depends on how positive the EV is. If your expected return is +20% on buy-in, your action is worth $1.20 per dollar of face. In a perfectly efficient market with no frictions, the fair markup would be 1.20.

Bob: And 1.15 means I'm selling below fair.

Uncle Tau: Probably. But "below fair" isn't automatically bad. That's where most of the confusion is. Hold that thought. Right now I want to get the definition locked down.

What you're actually doing when you sell

Bob: So mechanically. I sell 40% at 1.15. What happens?

Uncle Tau: The buyer gives you 40% × $1,000 × 1.15 = $460. You pay the $1,000 buy-in. Your net cost to enter is $540 instead of $1,000. If you bust, you lose $540 — not a thousand. If you cash $10,000, you keep 60% of the prize plus the $460 that was already in your pocket. The buyer gets 40% of whatever the tournament pays out.

Bob: So the markup is the thing that pays me for the risk I'm taking on their behalf. No, wait — for the edge I'm giving them access to.

Uncle Tau: Edge. Not risk. You're sharing the edge. The risk is shared automatically — they take a proportional slice of the tournament outcome whether it's good or bad. What the markup pays for is your positive expected value. You built the edge, they're renting a piece of it.

Bob: What if I have no edge?

Uncle Tau: Then fair markup is 1.00 and any buyer who pays more than that is setting money on fire. You wouldn't find one. The reason anyone pays markup is because they believe you have edge — your Sharkscope, your results, your coach's reputation, whatever they're looking at. The belief in your edge is what lets markup exist.

Bob: OK this all sounds obvious when you say it.

Uncle Tau: It sounds obvious when anyone says it. That's why markup arguments on forums are so useless. Everybody knows what it is. Nobody can agree on what it should be.

Markup is a covered write

Bob: You said before that this was — what did you call it — a covered thing.

Uncle Tau: A covered write.

Bob: Explain.

Uncle Tau: When you own an asset and you sell a claim on part of it up front for cash, you've written a covered call. You hold the position. You collected the premium. You're obligated to hand over a share of the outcome when it resolves. This has been one of the most heavily studied objects in finance for fifty years.

Bob: And my tournament is the asset.

Uncle Tau: Your tournament entry is the asset. The markup is the premium. The 40% of outcome you hand over is the covered-call obligation. Fischer Black and Myron Scholes wrote the pricing paper for objects like this in 1973. Merton got the Nobel for the extension. The theory of what a covered write is worth — as a function of the underlying's expected value and its variance — is fully developed, sitting in every finance textbook.

Bob: So when I sell action, I'm running the exact same trade that some hedge fund does against Apple stock.

Uncle Tau: The underlying is different. The mathematics is the same. The asset has a random payoff. You hold it. You sell a claim on part of that payoff for a premium now. The premium compensates the buyer for the risk they're taking — and rewards you for the variance you're shedding. That second part is the part most poker players miss, and it's why selling at "below fair" markup isn't the disaster they think it is. But that's a different lesson.

Bob: So all of this is solved?

Uncle Tau: The pricing is solved. The execution is solved. The only thing that isn't solved is how confident you are in your edge. Which is the same unsolved problem as everything else in this app.

Why markup exists at all

Bob: OK so to pull it together. Markup is the price buyers pay above face, which exists because winning players have positive EV that they can share with backers.

Uncle Tau: Right. And it's a two-sided market. Sellers need capital they don't want to put up themselves, or variance they don't want to carry. Buyers want a piece of positive-EV tournaments without grinding the seat. The premium is how the two sides meet. No premium, no market. A 1.00 market is a market for zero-edge players. A 1.20 market is a market where buyers believe they're getting meaningful edge. Whatever number markup is in your part of the poker world, it's telling you what the market thinks the edge is, on average, for whoever's selling.

Bob: And I saw a Field Notes piece where you said markups have compressed.

Uncle Tau: Mid-stakes median dropped from 1.15 to 1.08 in about a year. That's not a small move. The market re-priced the belief in the seller's edge. Supply of sellers went up, buyers got sharper, and the premium collapsed toward the math. That's the market doing its job. What it means for you: if you used to earn money from markup premium on top of your play, that subsidy is thinner than it was. You haven't gotten worse. Your market has.

Bob: OK one more thing. What's "fair" markup, actually? Is it just 1 + ROI?

Uncle Tau: That's the zero-friction answer. In practice, it depends on the buyer's side too — their tax situation, their bankroll, whether they're diversifying across many sellers. But as a first pass, yeah. 1 + ROI is the markup where the buyer breaks even in EV terms. Above that, the buyer is paying for the seller's edge. Below that, the buyer is getting a discount — which happens in this market all the time, and there are real reasons for it. Also a different lesson.

Bob: You're going to paywall it, aren't you.

Uncle Tau: The real number is a separate conversation — posterior width, Arrow-Pratt risk premium, geometric growth. Comes up on a subscriber call. This one just tells you what markup IS. That's free.

Bob: Everybody's a hypocrite.

Uncle Tau: Go estimate your shapes, kid.

What's next

• Makeup — the flip side: what happens when the tournament doesn't pay, and the backer carries the deficit.
• Profit Chop — once the stable has profits to distribute, who gets what. Spoiler: not "equal slices."

Further reading

• Black, F. & Scholes, M. (1973). "The Pricing of Options and Corporate Liabilities." Journal of Political Economy.
• Hull, J. Options, Futures, and Other Derivatives. Chapter on covered calls.
• The origin conversation: Bob and Uncle Tau: How a Bumhunter Who Read Too Much Built MUCHO MOTA on the muchomota Substack.
• Field Notes: 3 Things I Saw This Week That Nobody's Talking About — the piece on markup collapse.