Live data from Hacker News

The Black-Scholes/Merton equation [video]

youtube.com

21–30 of 90 posts

Re: The Black-Scholes/Merton equation [video]

#21

[flagged]

Derivatives are a zero-sum game. If someone lost a trillion dollars trading them, someone else made a trillion dollars trading them. It will always result in a net 0.

I agree that they are a zero sum game, but I’d argue that the sum is a net positive for traders over a long period of time, and the people who are systematically loosing are the workers who’s true earnings were siphoned away from them and onto the stock market, where they are sold as derivatives.

This manifests in e.g. how much cheaper it is for people to borrow money who hold a large stock portofolio, how interests in a normal savings account are usually much less than people who keep stocks, etc.

If you trade in derivatives perhaps every individual trade is a zero sum game, but taken together a whole year of trading yields benefits regardless, and that is also a zero sum game, but this time an unfair one, where you are guaranteed earnings at the cost of the workers.

Re: The Black-Scholes/Merton equation [video]

#22

Earlier quoted context omitted.

Former option trader here. The free parameter is actually the "thing" that you're actually trading when you trade an option. All the other parameters are just environmental, you look them up. The short story is that the implied vol is a sort of balancing price between how much the option loses in value over time vs how much you can make performing the hedge.

Why do any of the other variables matter if the market is collectively fighting between "overpriced and underpriced" on premium/implied volatility?

The Black-Scholes equation describes the unconscious biases that influence the price of options. It is able to beautifully separate the one quantity that every trader prices differently from the rest. That’s volatility.

All the other factors, time including, are the same for everyone.

Re: The Black-Scholes/Merton equation [video]

#23

How does this square with "past market returns are do not (entirely) determine future market returns"? Surely the same applies to the historical stddev?

Volatility is a bit more predictable than price. And there are more complex formulae that also model volatility rather than treat it as a constant.

Re: The Black-Scholes/Merton equation [video]

#24
post #2

Black-scholes is a hedging argument, the eqn isn't the essence of it

Eh, put-call parity is the hedging argument [1]. Black-Scholes-(Merton) was a breakthrough because it lets one understand why the hedge works, and thereby hedge and price more precisely. [1] https://en.m.wikipedia.org/wiki/Put–call_parity

Taleb and Derman have argued that put call parity implies BS but other disagree quite strongly.

Re: The Black-Scholes/Merton equation [video]

#26

Earlier quoted context omitted.

Eh, put-call parity is the hedging argument [1]. Black-Scholes-(Merton) was a breakthrough because it lets one understand why the hedge works, and thereby hedge and price more precisely. [1] https://en.m.wikipedia.org/wiki/Put–call_parity

What I never fully understood is there’s a free parameter in the equation (Implied Volatility)- which has no solid definition besides “the number that makes the rest of the equation work”. At that point… how much value are you really getting from the rest of the equation?

This equation is an idealized option, a spherical cow. If one would actually use it to price options one would lose money.

There are many empirical option pricing features that this equation can't explain - the "smile", the "skew", ...

Re: The Black-Scholes/Merton equation [video]

#27

How does this square with "past market returns are do not (entirely) determine future market returns"? Surely the same applies to the historical stddev?

This is why options traders (prototypical ones at least, I suspect most trading is still directional) trade on the implied volatility, as a projection of future volatility.

You take a view on volatility by buying or selling an option, if you are right then you will make money proportional to the options gamma (i.e. the convexity of the option is where the money comes from)

Re: The Black-Scholes/Merton equation [video]

#29
Pure Black Scholes is not really that useful nowadays because of its key limitations, some can be easily fixed (dividends, no risk free rate, etc.) other cannot (constant volatility) which makes it only useful in areas like vol targeting where you want the volatility to be constant.

Re: The Black-Scholes/Merton equation [video]

#30
I've been trading for 4 years on the side mostly on intuition. I like to think one can emotionally program the powerful computer that is the unconscious mind to serve the distributed monster of global finance for profit. Sometimes I even do tarot. Seems to kinda work LoL what could possibly go wrong????
Post reply on HN