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The Black-Scholes/Merton equation [video]

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

#61

Post by scherlock »

kgwgk wrote: post #43
scherlock wrote: post #9

Earlier quoted context omitted.

Implied volatility is really the standard deviation of the price over time. You can calculate it by look at prices in the market. Then interpolate values. Where banks get funky is that the market for options go out about 3 years, but a banks will write options going out much much further. For those options, they are really just guessing, no matter how much fancy math they do, it's all to dress up a guess. And the tra…

> Implied volatility is really the standard deviation of the price over time. Maybe you mean that “implied volatility is really the implied standard deviation of the price over time”.

Sorry, yes, that is the better definition.

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

#63

Post by jliptzin »

btdmaster wrote: post #13

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

You can make money just indiscriminately selling option premium, many do. You just have to do it in a way that you're sure you won't blow yourself up. You make money because you are paid for taking on that volatility risk. Just like an insurance company.

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

#64

Post by lvl102 »

SirLJ wrote: post #46

If someone is interested in all this, I would strongly recommend looking into Ed Thorp, he discovered pretty much the same thing earlier, but instead of publishing, he made money with the knowledge... Great book about all this, 2017 Autobiography: "A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market"

Ed Thorp worked with Claude Shannon. That time in Cambridge, MA must’ve been amazing.

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

#65

Post by SirLJ »

AlexCoventry wrote: post #49
SirLJ wrote: post #46

If someone is interested in all this, I would strongly recommend looking into Ed Thorp, he discovered pretty much the same thing earlier, but instead of publishing, he made money with the knowledge... Great book about all this, 2017 Autobiography: "A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market"

The video refers to him.

You made me watch this :-) still another book worth reading and not mentioned there:

"When Genius Failed: The Rise and Fall of Long-Term Capital Management"

https://en.wikipedia.org/wiki/When_Genius_Failed

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

#66

Post by SirLJ »

lvl102 wrote: post #64
SirLJ wrote: post #46

If someone is interested in all this, I would strongly recommend looking into Ed Thorp, he discovered pretty much the same thing earlier, but instead of publishing, he made money with the knowledge... Great book about all this, 2017 Autobiography: "A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market"

Ed Thorp worked with Claude Shannon. That time in Cambridge, MA must’ve been amazing.

Especially for Shannon :-)

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

#67

Post by TacticalCoder »

ripjaygn wrote: post #39

[flagged]

This LLM generated garbage is pure rubbish. BTW I'm not saying all LLMs outputs are garbage: but that one is the usual confident fart.

> discusses the work of Louis Bachelier, who in 1900, derived a formula to price options. This formula, known as the Black-Scholes-Merton formula

Fuck no: BSM is called BSM because Black, Scholes and Merton build up on the work of Bachelier. Otherwise it'd have been called the "Bachelier formula" or something like that.

Downvoted and flagged for having generated and posted vomit.

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

#68

Post by wslh »

JackFr wrote: post #42

There is some valuable intuition in that the value of an option can be broken into three components, the intrinsic value - that is the difference between the asset price and strike price on the option, the time value which is dependent on the time to expiry and the risk free rate, and the “insurance” value which is dependent on the volatility and the time to expiry. In the swaptions market, for instance quotes are ty…

Ignorant question: is it just bare speculation priced there as a component?

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

#69

Post by tel »

btdmaster wrote: post #13

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

The variance component, implied volatility, is more often than not treated as the _output_ of the equation. By looking at the prices of options you can determine what the market currently, implicitly, estimates the future variance of underlying to be.

Lots of options trading involves taking a position on whether you think that implicit estimate is too high or too low. Generally, a long options position encodes belief that volatility is cheap and visa versa. Options are also a very specific kind of instrument and can be used to craft very specific bets on volatility. For instance, you might feel that the options at a $200 strike are pricing too high of an implied volatility compared to those at the $195 and $205 strikes.

Traders build an intuition around the model instead of treating it as in and of itself predictive. They instead try to price or take bets on certain derived quantities from it (the "greeks").

The saying goes that implied volatility is "the wrong quantity put into the wrong model in order to make the right decision".

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

#70

Post by anonymouse008 »

wslh wrote: post #68
JackFr wrote: post #42

There is some valuable intuition in that the value of an option can be broken into three components, the intrinsic value - that is the difference between the asset price and strike price on the option, the time value which is dependent on the time to expiry and the risk free rate, and the “insurance” value which is dependent on the volatility and the time to expiry. In the swaptions market, for instance quotes are ty…

Ignorant question: is it just bare speculation priced there as a component?

That’s the market clearing volatility
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