How prevalent is quant knowledge among the option traders here?

[tommcginnis]

Zero sum means one needs an "edge", or a method to win, like playing poker and Blackjack. Positive sum means if I play long enough, I should come out ahead even if I have no edge and trade randomly. The only question is the distribution of the positive sum among us. That is probably why I can make a living trading.

Thank you for your coaching.

No, that's not what zero-sum or positive-sum means at all.
https://en.wikipedia.org/wiki/Zero-sum_game

 

[ironchef]

Beating buy-and-hold is a fun question. In general - yes you can. The market supports that assumption as well. If it was true that the efficient market hypothesis dominated the markets then you wouldn't be able to. However, given that people consistently and frequently produce above market returns - something is amiss. What is amiss is the tail risk. The tail risk of the underlying distribution of price changes is far greater than the normal distribution would have you guess. I encourage you to verify this. The standard deviation of price changes of most stocks will regularly and predictably exceed 3 standard deviations. Under the BSM, this would be essentially impossible. There is certainly some exploitability in this.

I plotted many underlying prices and indeed all had fat tails (closer to Laplace than Normal). But even then, the tail events are quite rare.

Can you comment on Taleb's method?

 

[Aquarians]

>> "Stop being so smug. It's unbecoming of you given you are trying to start a hedgefund on like $500". (newwurldmn)

On almost every one of your posts you're patronizing and insulting me. I'm not interested in your opinions, you add nothing positive to the discussion. Stay out of my threads.

 

[ironchef]

No, that's not what zero-sum or positive-sum means at all.
https://en.wikipedia.org/wiki/Zero-sum_game

This is what your link said:

In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which each participant's gain or loss of utility is exactly balanced by the losses or gains of the utility of the other participants. If the total gains of the participants are added up and the total losses are subtracted, they will sum to zero. Thus, cutting a cake, where taking a larger piece reduces the amount of cake available for others, is a zero-sum game if all participants value each unit of cake equally (see marginal utility).

In contrast, non-zero-sum describes a situation in which the interacting parties' aggregate gains and losses can be less than or more than zero. A zero-sum game is also called a strictly competitive game while non-zero-sum games can be either competitive or non-competitive. Zero-sum games are most often solved with the minimax theorem which is closely related to linear programming duality,[1] or with Nash equilibrium.

In any case there are some great posts on this thread as I gained some very valuable insights.

 

[ironchef]

All options are a zero sum game. What makes it not a zero-sum game is the trading of the underlying to create a synthetic option. This just takes/gives pnl to another asset class which is how both counterparties can earn/lose.

 

[raf_bcn]

Hi

An interesting discussion.

The example from @ajacobson is good , but when the market maker buys the put he is probably buying it at the ask price. So he will lose what he gained selling the call. And not to mention the interest that he will pay for being long stock. And the fees and commissions. So not easy.

As a retailer I have tried to think about and also to use some arbitrage techniques. I don't like to choose a market direction.
It is very difficult without having the same tools the Market makers have . When I use these strategies more than 50 % of the gross profit goes to the broker with commissions and interests.
So the broker is also your opponent. I don't know exactly how market makers work but I think one of the main edges for them could be not having a broker.

You could be a quant, searching for statistical arbitrage, and be very good but if you don't have the tools, i.e. low margin, and low commissions and interests, it will be very difficult for you.
It's only my opinion.

By the way, do you think a broker would contract me to generate lots and lots of commissions and interest without risk ? Ops, I think this is what I am already doing.


thanks.

 

[ironchef]

The example from @ajacobson is good , but when the market maker buys the put he is probably buying it at the ask price.

I have never encountered a MM buying at ask and selling at bid?

 

[gaussian]

>> "Stop being so smug. It's unbecoming of you given you are trying to start a hedgefund on like $500". (newwurldmn)

On almost every one of your posts you're patronizing and insulting me. I'm not interested in your opinions, you add nothing positive to the discussion. Stay out of my threads.

Perhaps don't say "By the way, anyone calling themselves a quant should know this." The tone of this sentence is condescending and patronizing. Don't be wrong when you're condescending on someone. Don't give people a reason to be a jerk back to you.

 

[nooby_mcnoob]

If you ignore what people say and focus on the substance of what they're saying, life is a lot easier.

 

[destriero]

Aquarians, give us an application of Ito without using Wikipedia. Until that time... stop with these absurd threads. The world needs ditch diggers too.