A web-reading bot made millions on the options market • Hacker News Board

Re: A web-reading bot made millions on the options market

#131

Post by loumf » Tue, Apr 28, 2015, 3:08 PM UTC

encoderer wrote: post #95

patio11 wrote: post #7

This touches on several of the Big Issues with being a market maker, shopping large orders, and HFT. Sadly, it's exactly as detailed as you'd expect a Slate article to be. It doesn't matter that it is a bot. The controller of the bot happens to be, in this instance, directional order flow : unlike the overwhelming majority of market volume, he actually has an edge . The options market maker is, unusually for market m…

Floor traders are not there to take the other side of a trade. The minute your market maker completed his option trade he hedged it by buying or shorting shares at the equiv delta risk. This is one reason spreads widen on option sales when the market gets busy, and the reason there is put side volatility skew. In both cases it's covering the risk that the price will move before they can hedge their position.

I wrote options software for 4 years (and was in FinTech for 12) and I am just writing this to say that this is right (in case you are wondering).

Re: A web-reading bot made millions on the options market

#132

Post by pjlegato » Wed, Apr 29, 2015, 6:04 PM UTC

forthefuture wrote: post #127

amelius wrote: post #121

Earlier quoted context omitted.

That's a great explanation, thanks! However, I still don't see the necessity of these instruments. For example, wouldn't it be more natural for a pension fund to just spread the risks by buying different stocks? Also, I'm not convinced that derivatives would decrease instability. Like I said, I would guess they do the opposite. Perhaps there is some theory that can show this (something akin to e.g. the fact that pass…

I think the real answer is that things don't need to be necessary to exist. Options are just another way to structure investment. They exist because someone decided to create them, and they continue to exist because humans don't like losing things they already have.

Well, for that matter, stocks don't need to exist, either. We could go back to the medieval way of requiring all business enterprises to be fully funded by the founders personally. The problem is that greatly restricts the scope of what kinds of businesses can exist, since most interesting things for a business to do require a lot more capital than most people have or can raise.

There are many examples of failed derivatives instruments -- that is, derivatives instruments that once existed and no longer exist today because of lack of interest in using them. They performed an insufficiently useful economic role, so nobody traded them. Today, for example, there is an ongoing effort to list real estate futures, but there is little marketplace interest and they will probably be delisted within the next few years.

The derivatives that survived survive not from mere inertia, but because people (not some abstract "system," but real people) find them economically beneficial in some way.

Re: A web-reading bot made millions on the options market

#133

Post by hueving » Wed, Apr 29, 2015, 8:47 PM UTC

nostrademons wrote: post #60

hueving wrote: post #52

Earlier quoted context omitted.

"the deal"... Is still being negotiated Company x has been looking "to acquire" a player in field y for some time and hasn't found any candidates yet. Keyword analysis by itself is almost completely useless.

Since when do newspapers write about the lack of something happening? That's sort of anti-news, isn't it? I could potentially see them writing something like that as a throwaway sentence in another article about the company, but the phrasing you've quoted is incredibly awkward and would probably never make it into a real news story. Also, an algorithm doesn't have to be perfect, it merely has to be right more often t…

When it comes to market speculation, non-news is published quite frequently. Often time it comes in the form of stories that summarize what happened that week.

Re: A web-reading bot made millions on the options market

#134

Post by pjlegato » Mon, May 04, 2015, 11:23 PM UTC

amelius wrote: post #121

pjlegato wrote: post #117

Earlier quoted context omitted.

Options and many other derivatives are not merely a casino game. Their unique role as financial instruments is to allow the transfer of risk from those who have risk and don't want it (hedgers) to those who don't have any risk and do want it (speculators). This is different from gambling because gambling by definition involves the creation of entirely new risk for the purpose of wagering; derivatives transfer pre-exi…

That's a great explanation, thanks! However, I still don't see the necessity of these instruments. For example, wouldn't it be more natural for a pension fund to just spread the risks by buying different stocks? Also, I'm not convinced that derivatives would decrease instability. Like I said, I would guess they do the opposite. Perhaps there is some theory that can show this (something akin to e.g. the fact that pass…

> However, I still don't see the necessity of these instruments. > For example, wouldn't it be more natural for a pension fund to just spread the risks by buying different stocks?

That's like saying, "Wouldn't it be more natural for a homeowner to just spread the risk of fire by buying multiple houses?"

Yes, in theory you could buy 2 houses and just move into the 2nd house if the first one burns down... but it's much more cost efficient to buy one house and get insurance on it. You'd have to buy 2 inferior houses instead of putting all of your money into 1 nicer house and paying a small amount for insurance.

There are lots of theories and studies on the topic of stability, though it is very hard to draw firm conclusions as the economic and financial conditions at any given moment are unique, making repeatable experiments difficult or impossible.

Another complicating factor is that you can make lots of money by discovering a way to make market systems more stable that nobody else knows about, so much of the research on the topic is secret.