In a perfect world, even the OTC markets would be marked to market on frequent basis (there is Totem and the brokers market, after all). In an imperfect world, you have all sorts of cheats and liars so the less transparent the market is the more damage they could do. Personally, I would love for all of that stuff to move to some sort of exchange-like model so there would be no room for games.
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Implied Volatility in plain English
- Thread starter optionsforum
- Start date
SLE: You are right. I used listed when I shouldn't have. I don't trade such animals, I trade options and am always suspicious of their pricing as well. I treat the options market like I knew for certain everyone around the poker table is double-dealing and taking a cut when I look away or go to the washrooml.
Another example was libor fixing. How is that even possible? If that can be fixed, then anything can be. I remember that everytime I sit down at the table.
The same argument about mis-pricing not being obvious at the time applies to every instrument. Just because you "know" (or suspect) that something is mis-priced doesn't mean it will revert in time, nor that you know the direction of the error or the amount. Usually an "arb" trade can be fashioned as you say. In my book, an arb will not lose and if I am not certain I pass on the trade.
Mark to market is not really relevant since the point of an arb is that at some date simply by holding, the true price MUST appear. (BTW, I know of one case where a true convertible arb actually lost money without trading! Nothing is impossible in the markets.)
Volatility may have no physical meaning at all though. In electical engineering we do a lot with the square root of minus one. We are taught it is simply a convention to make the math of the model work and that there is no real world equivalent. It is a communication term. Implied volatility is similar. It makes the math work and some people start believing in the model or terms more than the real world. However, no model of the universe can be perfect or it would be a one-to-one replacement of that universe. Simplification can throw out important data as "assume".
In summary, different semantics aside, we are indicating similar thoughts.
Another example was libor fixing. How is that even possible? If that can be fixed, then anything can be. I remember that everytime I sit down at the table.
The same argument about mis-pricing not being obvious at the time applies to every instrument. Just because you "know" (or suspect) that something is mis-priced doesn't mean it will revert in time, nor that you know the direction of the error or the amount. Usually an "arb" trade can be fashioned as you say. In my book, an arb will not lose and if I am not certain I pass on the trade.
Mark to market is not really relevant since the point of an arb is that at some date simply by holding, the true price MUST appear. (BTW, I know of one case where a true convertible arb actually lost money without trading! Nothing is impossible in the markets.)
Volatility may have no physical meaning at all though. In electical engineering we do a lot with the square root of minus one. We are taught it is simply a convention to make the math of the model work and that there is no real world equivalent. It is a communication term. Implied volatility is similar. It makes the math work and some people start believing in the model or terms more than the real world. However, no model of the universe can be perfect or it would be a one-to-one replacement of that universe. Simplification can throw out important data as "assume".
In summary, different semantics aside, we are indicating similar thoughts.
Quote from sle:
......
I appreciate the presence of intelligent people on this board, I really do (otherwise, I'd not post here). Hopefully we are arguing here in "pursuit of truth and happiness", not to prove to the world that we are right and other are wrong.......
I wanted to address this point separately.
Of all the forums on this board, I find the option discussions most filled with disagreeable comments. I may know a lot, but I certainly don't know everything (LOL no matter how sure I may sound at times.). I can learn from almost everyone. IMO there are lot of insecure option traders based on my reading the option posts.
Recall when we first met, I entered an opinion and was eventually shot down by one person when I dared to challenge something you had posted. That person got quite ridiculous and eventually stepped aside after trying to rattle me. You were always a gentleman. However I immediately put you on my own list2 (Caution flags). Everything I read from you I spend more time on because I am never sure of your true motives. Yet your replies this time made me move you to my list1 (interesting and accurate traders I can learn from). I apologize to you personally for that. It was my error. You now appear to be genuinely trying to help like many others on this forum.
I notice some newbies being challenged in forums by ad hominem attacks - a no no in my book. After several nonsense posts, I may tune out or challenge points by an author but I was a newbie ( or may still be compared to some in this forum) once. If there were no newbies, none of us could measure how far we have come. This is why I keep lists on this forum of users.
I am OK with being challenged since it makes me re-think my positions and learn from them. Hopefully others can learn at the same time. Very few mistakes are unique, often it is the person refusing to listen that is the problem. I am even OK with being wrong if I can understand the mistake. I am even OK with saying I am completely wrong although that is tough for me at times.
So yes, you and I are discussing here in order to teach all posters and to learn more ourselves at the same time. I appreciate all who take the time to do this (including yourself) since your profit from doing is much more ethereal. It says something about being a good person IMO. Others taught me and I feel an obligation to pass on some of what I now know about options and trading. My advice may be complete garbage to others but the markets are a mixture of methods and thinking. For now, the markets tell me that my models are profitable, whether they are at the core factual, is irrelevant IMO.
Quote from StarDust9182:
SLE: You are right. I used listed when I shouldn't have. I don't trade such animals, I trade options and am always suspicious of their pricing as well. I treat the options market like I knew for certain everyone around the poker table is double-dealing and taking a cut when I look away or go to the washrooml.
Another example was libor fixing. How is that even possible? If that can be fixed, then anything can be. I remember that everytime I sit down at the table.
The same argument about mis-pricing not being obvious at the time applies to every instrument. Just because you "know" (or suspect) that something is mis-priced doesn't mean it will revert in time, nor that you know the direction of the error or the amount. Usually an "arb" trade can be fashioned as you say. In my book, an arb will not lose and if I am not certain I pass on the trade.
Mark to market is not really relevant since the point of an arb is that at some date simply by holding, the true price MUST appear. (BTW, I know of one case where a true convertible arb actually lost money without trading! Nothing is impossible in the markets.)
Volatility may have no physical meaning at all though. In electical engineering we do a lot with the square root of minus one. We are taught it is simply a convention to make the math of the model work and that there is no real world equivalent. It is a communication term. Implied volatility is similar. It makes the math work and some people start believing in the model or terms more than the real world. However, no model of the universe can be perfect or it would be a one-to-one replacement of that universe. Simplification can throw out important data as "assume".
In summary, different semantics aside, we are indicating similar thoughts.
"Volatility may have no physical meaning at all though. In electical engineering we do a lot with the square root of minus one. We are taught it is simply a convention to make the math of the model work and that there is no real world equivalent. It is a communication term. Implied volatility is similar. It makes the math work and some people start believing in the model or terms more than the real world. However, no model of the universe can be perfect or it would be a one-to-one replacement of that universe. Simplification can throw out important data as "assume"."
Excellent- this is what I think I am struggling with. The models are not perfect- so how do you "arb" anything without inherent risks especially in a dynamic environment Its all a guess on the underlying however options have embedded value relative to long/short flat price that far exceeds what traders realize ?
"Volatility may have no physical meaning at all though. "
WHAT??
Of course volatility has a physical meaning.
It's as real as 'average height' or 'standard deviation of IQ'.
It is no square root of -1 and is a part of the real world.
It's a measure of how 'volatile' is the price of the underlying. 'Volatility' may be a derived parameter but you can tell a high volatility stock from a low volatility stock by looking at their graphs.
http://en.wikipedia.org/wiki/Volatility_(finance)
http://en.wikipedia.org/wiki/Implied_volatility
WHAT??
Of course volatility has a physical meaning.
It's as real as 'average height' or 'standard deviation of IQ'.
It is no square root of -1 and is a part of the real world.
It's a measure of how 'volatile' is the price of the underlying. 'Volatility' may be a derived parameter but you can tell a high volatility stock from a low volatility stock by looking at their graphs.
http://en.wikipedia.org/wiki/Volatility_(finance)
http://en.wikipedia.org/wiki/Implied_volatility
Quote from trilogic:
...... - this is what I think I am struggling with. .....
Sometimes, certain posters "speak the same language" as others. Two people can be saying the same thing but different people love or hate it simultaneously.
You may be interested in past threads called "who is really making a living trading options" or "Is option trading really profitable as a stand-alone trading practice?"
In top flight chess, there is a strategy against a known strong opponent called "taking the opponent out of the book".
Chess openings in some cases are known to dozens and dozens of moves - Ruy Lopez or Queen's Indian for example. If the opponent is probably equal or stronger and you are very good at creative thinking but not into memorizing thousands of trees of move and countermove, you can deliberately make an slightly inferior move to stop the use of the book and play mano e mano outside of memorization. Your opponent must play the correct counter move AND UNDERSTAND WHY OTHER MOVES ARE INFERIOR. That means he must have done more than memorize the teachings of the book model, he must understand the subtle principles twists of sound positional chess play.
Similarly, posts leave a trace to follow of the thinking of each individual trader. In the past, I have taken some out of the book in option trading to discuss principles (not rules - in chess rules can burn you) that ultimately point to the correct plan to follow.
If one can find a similar trading style and read their posts, one can accelerate the learning process and develop one's own unique style. I for example will search for example Nodoji or handle123 (there are many many more) with a specific keyword to read how they address a certain subject I am wondering about.
Simple rules, dynamic system and non-linear behavior is a chaotic system not a random system.
See "The flap of a butterflyâs wings in Brazil can set off a tornado in
Texas." - the title of a 1972 paper by MITâs Edward Lorenz, who began as a meteorologist.
See "The flap of a butterflyâs wings in Brazil can set off a tornado in
Texas." - the title of a 1972 paper by MITâs Edward Lorenz, who began as a meteorologist.
Quote from StarDust9182:
Sometimes, certain posters "speak the same language" as others. Two people can be saying the same thing but different people love or hate it simultaneously.
You may be interested in past threads called "who is really making a living trading options" or "Is option trading really profitable as a stand-alone trading practice?"
In top flight chess, there is a strategy against a known strong opponent called "taking the opponent out of the book".
Chess openings in some cases are known to dozens and dozens of moves - Ruy Lopez or Queen's Indian for example. If the opponent is probably equal or stronger and you are very good at creative thinking but not into memorizing thousands of trees of move and countermove, you can deliberately make an slightly inferior move to stop the use of the book and play mano e mano outside of memorization. Your opponent must play the correct counter move AND UNDERSTAND WHY OTHER MOVES ARE INFERIOR. That means he must have done more than memorize the teachings of the book model, he must understand the subtle principles twists of sound positional chess play.
Similarly, posts leave a trace to follow of the thinking of each individual trader. In the past, I have taken some out of the book in option trading to discuss principles (not rules - in chess rules can burn you) that ultimately point to the correct plan to follow.
If one can find a similar trading style and read their posts, one can accelerate the learning process and develop one's own unique style. I for example will search for example Nodoji or handle123 (there are many many more) with a specific keyword to read how they address a certain subject I am wondering about.
Thanks