51–60 of 90 posts
This got me thinking: Can the backpropagation algorithm be expressed as an equation? I assume this should always be possible using functional programming.
Are you talking about backpropagation in neural networks? Do you mean as a differential equation? It already is a normal algebraic equation.
The question that seems obvious, but no one ever seems to talk about, is how the failure of LTCM paved the way for the subprime crisis of 2008.
I mean, did the elite financial world fail to learn the lesson, or did it simply learn the wrong one?
Earlier quoted context omitted.
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?
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.
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.
Was BS actually of any practical use? It just seems to be a fantasy like most maths in economics.
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?
There was a PBS NOVA episode about this. https://vimeo.com/302855460 The question that seems obvious, but no one ever seems to talk about, is how the failure of LTCM paved the way for the subprime crisis of 2008. I mean, did the elite financial world fail to learn the lesson, or did it simply learn the wrong one?
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.
Earlier quoted context omitted.
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?
I don’t believe any of the comments below address the meat of your question - what value are you getting from the equation ? I would answer- not much. You can think of BS as a curried function. Since all the other params are fixed, you can curry and get a reduced equation that only depends on IV and underlying. If you do that, then its just - you give me iv and underlying, i give you spot. So, for a given strike(fixe…
But... what really happens (in my opinion) is... options makers or writers or whatever might set a price based on what they feel is fair/good for them/whatever
Then a bunch of people on Robinhood make memes over it, hammer the bid, IV goes to 160%, voila...
Why does "spot" price matter in that equation? Robinhood buyers + supply/demand are what drives IV in reality I feel.
There was a PBS NOVA episode about this. https://vimeo.com/302855460 The question that seems obvious, but no one ever seems to talk about, is how the failure of LTCM paved the way for the subprime crisis of 2008. I mean, did the elite financial world fail to learn the lesson, or did it simply learn the wrong one?
How would you connect the two events?
My point is you can't plead 20-20 hindsight.
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
Wasn't the main breakthrough it's utility and accessibility, not precision? It's still quite generalized in that it assumes a flat volatility surface, which even traders in the pits intuitively knew was wrong (thus the emergent volatility smile after '87). What it did allow was for a single number (implied volatility) to function as the single knob to be dialed to move quotes up and down for convex instruments. There…
Utility yes, accessibility no. It quantified the previously artistic. You may enjoy Peter Bernstein’s Against the Gods.
> pit traders were fine pricing different strikes at different vols
Former algorithmic options trader. We ate the former pit traders for breakfast. Modelling the volatility surface is an entire field, and to the extent problems in finance can be solved this is sort of one of them.