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This "strategy" is a classic interview question for option traders. The answer is, obviously, that it does not work, but I'll let you guys come up with the reason why.

I am rolling on the floor guys... seriously!

Well, lets imagine you always hold to expiration - if you could never lose, it's not a problem, right? :p

Unlike a proper insurance businss, you can't diversify away all of your risk - systematic market risk will still be there. If all stocks tumble like in 2011 or 2008 (or many times before that), you will be in trouble.

Ah, so here is a hedging "idea" :D Let's say I sell an OTM call and leave a stop order to cover the stock at the stock price if the stock ever gets there. Once the stock is over the price and I am long the stock plus short a call, I'd leave an order to sell it stop at the strike price. And so on...

You are making a distributional bet, so unless you are forced to cut your position, holding it to expiration is a given. The decay is pretty discrete given the increment, yes. What model? If you shock the vol and reprice, these things will fly and simple BS model will show that. For something...

What a print! 15.45 preliminary from last night close of 14.25. FSU, I hope you werent short straddles this time around

What you mean is that far wings have a lot of vega convexity risk. The question is, are you getting well compensated for that risk? The point is, as usual, that things are sometimes rich and sometimes not. If you have a proper risk management process, don't get greedy and understand the...

Few more thoughts on the topic. First of all, if you undestand the soures of overpricing like regulatory pressures in this case or institutional hedging in case of single stocks, you can pick your fights. There is a variety of actuarial methods that give you an ability to estimate the fair...

Not sure if that is the right logic. 95% probability is imputed from delta, which is calculated from the market implied vol. What you are actually trading in this situation is the market-implied probability against some predicted probability.

(a) What she's doing can be thought of as a regulatory arbitrage. Used to be that market-makers and banks were happy sellers of low downside in equitiy options, but after large losses in 2010 and 2011 most places clamped down on that practice. Also, with the aggressive consolidation in the hedge...

Don't you think you should be solving your own homework questions?

You guys are assholes and losers at the same time. It's remarkable. Making fun of a person commiting suicide (be it a schoolboy or a banker, no matter) definitely qualifies one as a grade-1 douchebag.

Market makers that bought these options from him also made money, so they are not so stupid after all. Thats the wierd thing about options - both buyer and sellers can make money or both of them could lose money.

Betting and trading are the same things. It would be interesting to see if far downside daily binaries reflect the regulatory pressures present in OTC products with exposures to daily gap (e.g var vs daily capped var). If they do, NADEX might be a great vehicle to sell that crash, since you...

Hmm. I don't have access to their site - what do the prices look like for daily OTM-sh stuff (e.g. a digital strip of -1%, -2%, -3%, -4% and -5% strikes)?

So, the crucial question is - where does the edge come from? The main reason to trade options is to take advantage of mispriced convexity (in a variety of ways). What sort of edge can one achieve in binary betting? is it all short-dated distributional bets?

hmmm... really? you might want to include delta in your calculations :)

I will use small words and short sentences, European digital can be priced and risk managed as an arbitrarily tight call spread (or put spread, same thing). Nadex or any other provider will use this replication for pricing/risk-managing and pass the cost on to you via bid/offer. This...

Comparable? Sure... How about an SPY ATM-ish digital for this Friday?If I replicate these things using SPY weekly 175/175.5 call spread, I get 0.42 @ 0.46 on screens (4% wide) if i translate from spot prices of 0.21 @ 0.23. Where does Nadex show the market? If I want to trade these in $100,000...