GAMBLING ON THE INEFFICIENCY OF THE OPTION FORMULA

Martinghoul said:
What do you not understand, ic? You don't understand why I find the OP's stream of consciousness posts amusing?
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I'm not sure it's even his consciousness, it's more like a random meme generator fed by random passages from Malcolm Gladwell books.
 
Sig said:
I'm not sure it's even his consciousness, it's more like a random meme generator fed by random passages from Malcolm Gladwell books.
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Indeed... OP's frequent references to the Dunning-Kruger Effect in this context are, how to put it, meta-ironic, maybe?
 
Sig said:
Are you familiar with volatility skew? You may want to read up on it a bit, as no intelligent discussion on this topic can take place without discussing skew and I've yet to see it so much as mentioned here.
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Yes.

I dont think you can apply it for profitable trading , I don't believe most traders can time the markets , based on their information beliefs systems .

If you were to read option volatility skews based on supply /demand of puts calls , it is not a good guide to know the market or future price behaviour.
The volatility skew are caused by directional bets or standard systematic orders or just random ?How can you tell?

Technical anylysis on the higher time frame can give you a better idea , if backed by fundamentals .The instrument volatility , support , resistance and trend can give qualitative relevant information.Only a very small proportion of trades are based on options , there is no study to prove volatility skew can give an edge.At least I am prepared to learn , if there is

Common sense tells me , it would be irrelevant.

"Trading and investing are very simple processes and we human beings try to make it into something much more complex.Unfortunately, we have a lot of biases that enter into trading decisions.These can be volatility skews.

https://www.elitetrader.com/et/thre...al-and-possible-for-succesful-trading.304404/

K I S S
 
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Trading Education Buyer said:
Yes.

I dont think you can apply it for profitable trading , I don't believe most traders can time the markets , based on their information beliefs systems .

If you were to read option volatility skews based on supply /demand of puts calls , it is not a good guide to know the market or future price behaviour.
The volatility skew are caused by directional bets or standard systematic orders or just random ?How can you tell?

Technical anylysis on the higher time frame can give you a better idea , if backed by fundamentals .The instrument volatility , support , resistance and trend can give qualitative relevant information.Only a very small proportion of trades are based on options , there is no study to prove volatility skew can give an edge.At least I am prepared to learn , if there is

Common sense tells me , it would be irrelevant.

"Trading and investing are very simple processes and we human beings try to make it into something much more complex.Unfortunately, we have a lot of biases that enter into trading decisions.These can be volatility skews.

https://www.elitetrader.com/et/thre...al-and-possible-for-succesful-trading.304404/

K I S S
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The point flew well over your head I think. Take a look at when skew first showed up and why.
 
These posts remind me of a movie about a cretin illiterate gardner who somehow gets to be in the entourage of the vicepresident of the United States and noone is aware of his 'qualifications'. But he's one of the entourage so surely there must be something with him. So during conversations he's mostly quiet and when he speaks, he puts out some gibberish with botanical references. And everyone is blown away at the deep wisdom which obviously noone is able to comprehend.
 
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To have an edge, do an abscission of volatility's callose while taking into consideration the market inefficiency of accounting for the zygomorphic skew on the tails.

I got more such tips if you want.
 
Trading Education Buyer said:
We buy options , but the option formula pricing is innefficient.The option formula does not price in volatility of unexpected events



examples of unexpected events



1)stock market bubble

2)chinese devaluation impact on stock market bubbles bursting

3)greek crisis /financial crisis /euro crisis

4)profit warnings

5) fraud by corporate companies

6) other unexpected events like war ,terrorism etc


Option formula is a zero sum formula , neither has an edge i.e buyer seller .Both can lose.

The option formula does not take account of
1)trends ........it assumes zero edge for trends
2)Support /resistance supports hold up very well in stockmarkets indices guaranteed by the fed put
3)advanced option trading with rollover and multiple exits and entries.Rollover adds 30 % to my strategy
4) individual skills


if you buy options , at time of buying options these unexpected factors are not priced into the option price , option buyers gain when these unexpected events happen , as prices become extremely volatile and unpredictable.



Additional edge to beat the option formula can be found in systems designed to beat the formula , example progressive betting formulas on the option pricing models or systems and combinations of unique option strategies designed to beat the option formula.



http://www.investopedia.com/university/options-pricing/black-scholes-model.asp



The model makes certain assumptions, including:

  • The options are European and can only be exercised at expiration
  • No dividends are paid out during the life of the option
  • Efficient markets (i.e., market movements cannot be predicted)
  • No commissions
  • The risk-free rate and volatility of the underlying are known and constant
  • Follows a lognormal distribution; that is, returns on the underlying are normally distributed.
The formula, shown in Figure 4, takes the following variables into consideration:

  • Current underlying price
  • Options strike price
  • Time until expiration, expressed as a percent of a year
  • Implied volatility
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There are inefficiency in the options pricing.

You will not able to capture this, too many big firms are targeting this free money. With your 5K retail trader account (or even worst the spread betting account), there is no way you can compete with them to capture this free money.

Also, the market maker/specialist are getting smarter this day and have a way to mitigate the risk for options pricing inefficiency. Go and figure this out yourself
 
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