Recent content by longthewings

I agree, and your inequality makes the right point....basically, pricing is an absolute necessity. I also like the distinction between risk premia. To the OP - yes there are plenty of studies showing your premise to be true. If you want to try and make money on it, you need to do a few basic...

IV is not the unknown variable in BSM. IV is directly observed. It is the market price. The unknown variable is the instantaneous (actual) volatility of the underlying. The instantaneous vol is the input that must be input into BSM to correctly replicate the option. Think of it this...

A simple debit spread is a risk-reversal and therefore unstable to spot, vol, skew, and passage of time. Maybe you can consider it hedged at the onset, but I would argue it would be perfectly reasonable to continue hedging once the trade is in progress.

I think they likely view the strategy as an attempt to harvest the variance risk premium. I know there is a lot of debate about various risk premia in the markets (variance, skew, etc.), but in this case I think they view the ATM gamma to be consistently rich in price. Yes, you are right. In...

I would argue that it would be a mistake for you to try and move beyond black-scholes at this point. Black-Scholes has a lot of flaws, yes, but over the years a lot of tricks and gimmicks have been developed to address a lot of various issues (skew, jumps, discrete hedging, etc.). From my own...

Yes. I agree it is a very tall order to bridge the blackboard with the real world. All of the things you've mentioned are very real, difficult hurdles to overcome. Mishedges, jumps, and slippage can be brutal. I believe there are some decent ways to address your list, but it's definitely...

Yes, the outcome is different in terms of P&L variance. An unhedged ATM call option is just a ramp payoff to the upside. You will lose the premium paid or breakeven the majority of the time (say 82% of the time). But when you get a hit (the other 18% of the time), it's significantly bigger...

If you buy or sell a fairly valued option and delta hedge at the correct actual volatility continuously, then you will earn the risk-free rate guaranteed. The point is not to try and earn the risk-free rate. You can't hedge continuously, so you are not risk-free! The point is to buy cheap...

Sorry...from the original post I thought you were discussing a different area of the graph. Looks to me like a jump condition priced in for an event (i.e. dividend).

I believe this is likely due to the fact that you're showing the surface using puts only. Often times the listed closing mark on a given day for ITM options (in this case the upside puts) is distorted. Via put-call parity, options of the same strike should trade at the same IV (at least for...

Dynamic delta hedging MIGHT reduce the variance of your P&L, depending on what you are trading. How do you even know if you're calculating your deltas correctly? What vol do you use to even calculate it? What confidence do you have that your vol input is correct? Then again, in many ways...

Interesting question. But aren't there many assets that are bounded? Theoretically, a simple treasury bond is bound by 0, since market participants would just hold physical cash instead of accepting negative rates. Obviously, we are in the midst of a lot of central bank experimenting with...

If I thought it was going to go up, I'd probably just buy the underlying. Yes, skew can be negative, positive, flat, or symmetric (smile). Market dependent. Read the white paper on the CBOE put index (ticker: PUT). The index replicates the return of selling cash-secured ATM puts on SPX...

Interesting conversation here. Starting from the theoretical side, in a complete market with efficient pricing, continuous trading and hedging, no jumps, and purely time-dependent volatility, you can isolate the volatility perfectly and earn the risk-free rate on a hedged portfolio. So in this...

One simple example with a vertical would be to assume that it is approximately like pricing a binary (the replicating portfolio for a binary option is an infinitely tight vertical). Say you want to price the 100 / 110 call spread (numbers made up): Call Spread = (BS Value (100, ATM vol) - BS...