71–80 of 94 posts
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Safer bet would be to hold short term treasures.
I'd argue that's not a bet.
If that bets goes bad, the typical investor in Treasuries has perhaps bigger problems to worry about, but it’s still a bet IMO (and one which will inevitably eventually go bad).
Like all economics, this uses massive oversimplifications that never apply in the real world to imply some incontrovertible nature to free markets that simply does not exist. Spherical cows indeed. There was an article posted here recently about “mathy” equations that this reminds me of. Anyways read Das Kapital if you want to actually understand economies.
If you've read Das Capital, you have noticed it also uses massive oversimplifications in its models.
> imply some incontrovertible nature to free markets that simply does not exist. Spherical cows indeed.
Das Kapital (as one can guess from its name) also studies the spherical cow of the free market. The implication of incontrovertible nature, that's something in people's heads though, not in the models.
> There was an article posted here recently about “mathy” equations that this reminds me of.
Any math model (including models described in Das Kapital) is either going to be oversimplified or "mathy". The only other choice is non-math models, which doesn't seem very useful if you want to talk about money, prices, profits and other numerical stuff.
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Sorry, which limits? How do those apply to the increasing economic value of turning the same amount of sand into faster and faster GPUs, for example?
There are still finite people willing to buy whatever the intermediate or end product of that fancy sand is. And finite energy and space. And only 5 billion years until the sun goes red giant. The limits may be very large, but they aren’t infinite.
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European and American calls cost the same on non-dividend paying stocks (on dividend paying stocks, it might make sense to exercise an American just before the ex-date). Either way, as was pointed out, in reality BS is used as a deterministic one-to-one mapping between option prices and BS vols. Then, from market quotes (either as prices or as BS vols) a vol-surface is fitted (as a function of strike and expiry time)…
American style options are inherently more valuable. Imagine you had options on a stock that experienced a sharp but possibly temporary move. As a holder of an American style option, you could benefit from that temporary move, making it more valuable.
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Sure, but isn't most of supply and demand in the market driven by large investors who use such formulas to derive the fair price of the option? That is, if the real price ever differred significantly from what Black-Scholes predicts, wouldn't algorithmic trading very quickly correct this deviation?
If there was a way to directly formulate every parameter of the black Scholes formula you would be correct. The problem that you run into is how to calculate volatility itself? Without the volatility value, your algorithm cannot trade on it. Using history of volatility is insufficient, because volatility is a forward looking measure. Just because the stock was volatile in the past does not mean it will be in the futu…
That article says that implied volatility is inconsistent, with options at strike prices that are very far from the current market price having costs that imply a different level of volatility than options at strike prices that are close to the current price. The cute question here is "should an option be priced according to the actual level of volatility in the price of the underlying asset, or should it be priced according to the level of volatility that exercising the option would require?"
Volatility is just a quantity.
In modern finance the Black-Scholes formula is not used to "price" options in any meaningful sense. The price of options is given by supply and demand. Black-Scholes is used in the opposite way: traders deduce the implied volatility from the observed option prices. This volatility is a representation of the risk-neutral probability distribution that the markets puts on the underlying returns. From that distribution w…
However, one of the interesting aspects of serious option trading is that Black-Scholes is merely your bread and butter. There is a lot of information that goes into option pricing, including supply/demand signals. The mix of signals also depends on the time scale on which you are trading.
What rings true to me with this comment is the correlation between products. Option traders are often concerned with many relationships between product pricing: between underlying and option, across expiries, across strikes, between products in indices, between products in sectors, etc .
Earlier quoted context omitted.
American style options are inherently more valuable. Imagine you had options on a stock that experienced a sharp but possibly temporary move. As a holder of an American style option, you could benefit from that temporary move, making it more valuable.
The way the market is typically modeled, temporary moves are not a thing.
One of the most fascinating things about working on a trading floor is that models such as BSM transcend their normative aspect and become mental models. Pricing an option? Basically only two things matter: where the underlying asset forward price is at maturity (this is related to the concept of drift) and what the volatility is. At any time, your job is choose “bumps” (which you add to market prices) in order to ma…
What models do people use for SPY/SPX forward price?...
In modern finance the Black-Scholes formula is not used to "price" options in any meaningful sense. The price of options is given by supply and demand. Black-Scholes is used in the opposite way: traders deduce the implied volatility from the observed option prices. This volatility is a representation of the risk-neutral probability distribution that the markets puts on the underlying returns. From that distribution w…
I've only ever seen one thing:
Black-Scholes models say IV should be less but your broker/brokerage/the market are overpaying for it.
I always figured it was closer to a Vegas juice/vig.
I never understood the benefit really.
Complicated math to tell you lots of people want to play roulette on NVDA earnings and whatever you are going to pay for it is going to be "overpriced/overvalued" in at least one way.
I've never seen the opposite where it helps you find an edge and something was undervalued.
A few points: 1) Very nice exposition. 2) Near eq. (4) it is claimed that one cannot compute the delta \frac{\del C}{\del S} without stochastic calculus, since S is stochastic. That doesn't strike me as correct: C is just a deterministic continuous function of S, C, K, T, t, r, sigma; and computing partial derivatives does not require stochastic calculus. 3) It captures the notion that when you hedge, you use risk-ne…