Derivatives are the key to the rabbit hole

[newwurldmn]

The fountain of youth does exist. When the body is fed the foods it was designed to consume, and not the foods we humans eat because we can due to agronomist technologies, it rejuvenates and heals itself. But this is very bad for the pharma business and the medical (butchers) profession, who treat sickness rather than cure it, so you won't be getting much pressure to go raw and cut out poisons.

The same can be said for the market. Look at the huge amount of infrastructure that exists outside of risk-taking. Look at an investment bank for example. The actual assets of the bank and its clients are directly managed by a small group of risk-takers/managers. Goldman Sachs has thousands of employees but less than 10% of them are the ones decided when, what and how much to buy and sell. The rest of them are middlemen, customer support, internal support, admin and middle upper exec management. This is just one bank. So when you look at the ecosystem of the market and you consider that over 90% of people involved in the market don't give a flying fuck about taking risk. They are investor relations, prime brokerage, financial journalist, blah blah... Why is buy and hold so prevalent? Because there wouldn't be a mutual or pension fund business without it. No huge brokerage business without it, etc. So we the stuntmen on the ground in the thick of the shit can indeed find gems and pearls invisible to others because THEY DO NOT POSSESS THE EYES TO SEE.

Consider niche markets, like CDS trading, or even the new weather and climate derivatives that they are trying to get off the ground. How many people are actually executing trades in these markets? Not very many. There are probably alot of opportunities laying around waiting to make someone rich, but there aren't enough eyeballs fleshing them out.

To me, market efficiency is another theoretical concept that has distorted our general perception of how markets work. Markets are always in disequilibrium, for if they were totally efficient then participants wouldn't make or lose more than their proportionate share of the "pie". But we do everyday.

Ok

 

[Soon2Bgreat]

Derivatives are definitely not the panacea for bad trading or poor strategy...and can be a fountain of losses.

That said, I do think think understanding derivative pricing is critical to market understanding, even if you never intend to trade them. That is a worthwhile endeavor and should prove useful knowledge.

/my2vegas

 

[Pension_Admin]

Are you talking about arbitrage? On a small scale, it does exist. On a large scale, you have to look at what happened to LTCM.

Note: Traders have been able to create fortunes long before derivatives were invented. So derivative is not the key to the rabbit hole.

 

[Fractals 'R Us]

I want somebody to prove that risk free trading is impossible. I want an argument that would pass muster in Philosophy 101 [wherein we that aren't know-it-all-idiots learn that proving something is impossible is not doable]

 

[BrandNewTrader]

I want somebody to prove that risk free trading is impossible. I want an argument that would pass muster in Philosophy 101 [wherein we that aren't know-it-all-idiots learn that proving something is impossible is not doable]

Not provable. Which is why it's impossible. Same reason you injected "idiot" into the argument, to imply ignorance and conjecture on my part. Fair enough. You've bled and sacrificed during your market experience. Ever considered that you're just average due to your textbook yellow brick road formulaic pursuit of trading success? Or maybe you just have that personality flaw that substitutes insults for inquiry and discussion.

Ever heard of the Economic Fractalist Gary Lammert? If not you should check out his blog (not his website, years outdated) for his posts. EXTREMELY intriguing. Carry on fractal boy...

 

[Fractals 'R Us]

Not provable. Which is why it's impossible. Same reason you injected "idiot" into the argument, to imply ignorance and conjecture on my part. Fair enough. You've bled and sacrificed suring your market experience. Ever considered that you're just average due to your textbook yellow brick road formulaic pursuit of trading success?

Ever heard of the Economic Fractalist Gary Lammert? If not you should check out his blog (not his website, years outdated) for his posts. EXTREMELY intriguing. Carry on fractal boy...

perhaps you misread?

 

[OptionsMocha]

OP, read Fooled By Randomness by Taleb.

Taleb provides the insight that when it comes to traders, because the sample size is so large, it is impossible to attribute a traders success to skill as opposed to mere random chance (mere coincidence).

Keep this in mind when reading about case studies or stories of wildly successful traders. Taleb even argues that the greater the success of the trader the more likely the success is mere coincidence than skill or knowledge.

That doesn't mean all successful trading is due to randomness, but when studying other traders, it's impossible to assess if they are truely talented traders or merely lucky.

Risk free returns are not accessable to the retail trader. Humans are unpredictable and driven by emotion, and due to this unpredicatable nature there will always be risk. As long as others maintain an influence on the price of whatever you are trading there is risk.

 

[OddTrader]

From the experience of LTCM:

So, the predictable risk for risk-free returns could be unpredictably risky!

Or, the unpredictable risk for risk-free returns could be predictably risky!

Nothing is 99% sure all you can have is decent confidence in a move there are no ways to calculate probabilities in markets. Risk free profits are a pipe dream outside T Bills. LTCM said that the chance of them blowing up was once in billions if years, yet they blew up in just 4 months, only 4 years after inception.

 

[VTS]

I want somebody to prove that risk free trading is impossible. I want an argument that would pass muster in Philosophy 101 [wherein we that aren't know-it-all-idiots learn that proving something is impossible is not doable]

Since you mentioned Philosophy, it begs the question, do you understand it?

You should know full well you can't disprove a negative. You hinted it, but do you really understand why that is?

You can't prove risk free trading doesn't exist. You can only find evidence for it's existence, and when you come up empty handed the intelligent person concludes that based on what we know of the world we live in, the complete lack of evidence must therefore mean it does NOT exist.

Basic philosophy my friend. Insert option trading, or God if you like. You can't prove something doesn't exist. There's always an external concentric circle to back out to.


So the better question is, can you prove it does exist? When you and anybody else who tries fails at that exercise, can we then conclude that risk free trading does not exist?

 

[Windlesham1]

Are you talking about arbitrage? On a small scale, it does exist. On a large scale, you have to look at what happened to LTCM.

Note: Traders have been able to create fortunes long before derivatives were invented. So derivative is not the key to the rabbit hole.

Actually derivatives were around hundreds of years before stocks-based on the delivery of commodities from the New World and other territories, aboard ships which may or may not arrive safely to London and Amsterdam. Stocks are just for the sheeple