GAMBLING ON THE INEFFICIENCY OF THE OPTION FORMULA

[ironchef]

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

So, what can we small $5K retail traders do?

 

[southall]

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.

Always money to be made if you can predict price levels often enough but get out quick for a small loss if wrong. Even with a small spread betting account. Ive done it often enough over the years.

 

[galvinlee888]

Always money to be made if you can predict price levels often enough but get out quick for a small loss if wrong. Even with a small spread betting account. Ive done it often enough over the years.

I don't think those inefficiency price ever showed in those bucket shop price streaming.

If you are talking about predicting of market direction, this is completely different topic. I just want to let you know no one can do this (even institutional with ample resources) . If you can actually do this Consistently for long term, a straight Future trading will make you millionaires, if not billionaire.

 

[galvinlee888]

So, what can we small $5K retail traders do?

You can try, but likely your 5k will end up in your broker year end bonus or paid for the nice holiday trip of your bucket shop's owner.

I would rather spend this 5k for my own holiday

 

[tradelosses]

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

options are priced with much more complicated formulas that take into account 'black swans'. That's why the IV on the put-side is so fat. The option market is still efficient despite black swans. Taleb and others are wrong.

 

[destriero]

Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” – George Soros.

I plugged that into my macro and it produced a null error. Can you respond with pseudocode, plez?

Why did you short the call against your long futures in your options thread? What was the rationale for doing so? vol-edge? Alzheimers?

Is this your casino?

 

[monkeyjoe]

What was the rationale for doing so? vol-edge? Alzheimers?

It's good to see you are back.

 

[Windlesham1]

What exactly is your point, stick with commodities?

indexes or commodities- Enron is the standard you should apply to equities-ande for every put writer that says they are happy to own the stock at that level -how happy were they in Feb2009 when they sold?

 

[Windlesham1]

options are priced with much more complicated formulas that take into account 'black swans'. That's why the IV on the put-side is so fat. The option market is still efficient despite black swans. Taleb and others are wrong.

That's brave- Taleb is wrong! However even in the so called meltdown of 2008/9 put sellers were not wiped out as they simply rolled when volatility permitted into the next months. I don't wish any trader bad luck but good luck has permitted a lot of bad traders to survive when doing such dumb strategies-like Karen the super trader

 

[ironchef]

That's brave- Taleb is wrong! However even in the so called meltdown of 2008/9 put sellers were not wiped out as they simply rolled when volatility permitted into the next months. I don't wish any trader bad luck but good luck has permitted a lot of bad traders to survive when doing such dumb strategies-like Karen the super trader

What would be a smarter strategy may I ask?

Best wishes and happy new year.