Blaise Pascal
- Thread starter panzerman
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A cornerstone of all science is Unitarity, or the requirement that probabilities of all possible outcomes adds to one.
http://en.wikipedia.org/wiki/Unitarity_(physics)
That probabilites are unknown is one thing and likely the reason why it is so hard to apply in many cases. That they don't add to one (I am not sure you are suggesting that), well, write a paper on it and prove that is so. BTW, even in science, there have been cases where unitarity seems to be violated (certain processes in Quantum Electrodynamics), but that is usually a sign of a bad underlying theory and it is usually taken to be resolved at all cost.
You are right that precise probabilities are unknown in many cases in trading. But it is not true that it is unknowable in all cases. I work for an options market making firm. We make lots of trades with size. We have no idea which ones will be profitable, and which ones will be losers. We do know that with a high level of precision, 70% of those trades will be winners and 30% will be losers. As a frm, we have never had a down month in five years.
nitro
Isn't modern options more of a voting system than anything else, with the smartest options pricings taking advantage of this voting system in a way that for example, Black Scholes uses current Market prices to price options?
Therefore any concerns about probablility would instead be resolved by action in the bid ask.
Therefore any concerns about probablility would instead be resolved by action in the bid ask.
If I understand what you are saying, the answer is no. But I can't go into it deeply.
In the short term it may be about the price now, but if your volatility estimate is correct and the markets is off, the B/A will move to your correct vol estimate on average over many trades and strikes and expirations.
nitro