You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Mistruths about Options
- Thread starter aphexcoil
- Start date
Originally posted by aphexcoil
When I did econometric studies on Options, I did a test on the distribution of price changes in many various stocks, and the results did not approximate the Black Scholes Model exactly.
The Black Scholes model is known to not be precise, but close enough for the vast majority of participants.
In fact, there are several large players with proprietary pricing models that take advantage of many small inefficiencies in the market. There are also some good public papers on alternatives to Black Scholes model. They have their pros or cons depending on various environmental conditions.
But the problem for the retail trader is that the inefficiencies are often so small you can't overcome the inherent retail disadvantages in options trading (spread & commissions). Also, some inefficiencies (especially intermarket) require deep pockets in order to exploit.
Originally posted by aphexcoil
When I did econometric studies on Options, I did a test on the distribution of price changes in many various stocks, and the results did not approximate the Black Scholes Model exactly. In fact, the distribution of sigma changes in stock changes is not lognormal at all -- there are many high 3.5 - 4.0 sigma plus moves in stocks.
Actually, at the end of my study, I found that, if one were to precisely use the Black Scholes model to find out if writing an option would be profitable, many times the option writer would get screwed.
Also, there is an equation that is used to determine if a stock price can surpass a certain minimum or maximum, but that standard equation, which is used in the Black Scholes model, is flawed. It basically just checks if the stock price can get to a certain point *AT* expiration. There is a much more refined equation that actually shows that a stock can get to price X *anytime* before expiration.
I also did some work with delta-normal position strategies, and using options for VEGA (tau) strategies by normalizing the delta and playing options just off volatility changes.
There are old-timers that go so far as finding the gamma of gamma, but my own research has shown that this is just a waste of time.
However, if someone has a winning strategy, all the math in the world is not going to prove them wrong.
You don't have enough money to apply those strategies; you will be killed ...
Originally posted by dottom
But the problem for the retail trader is that the inefficiencies are often so small you can't overcome the inherent retail disadvantages in options trading (spread & commissions).
Still, the retail trader is able to use several well understood methodologies (e.g., spreads, straddles/strangles, butterflies, etc) and target a decent return while risking very little. Not to mention the benefits of (delta/gamma) neutral strategies. Options trading is full of opportunities, for traders with all sizes of trading accounts, if you know how to find them and manage them.
JayK,Originally posted by JayK
Still, the retail trader is able to use several well understood methodologies (e.g., spreads, straddles/strangles, butterflies, etc) and target a decent return while risking very little. Not to mention the benefits of (delta/gamma) neutral strategies. Options trading is full of opportunities, for traders with all sizes of trading accounts, if you know how to find them and manage them.
You quote me out of context. Why not include the first two paragraphs as well? If you read my post carefully you will understand I was referring to Alphe's post where he did "econometric studies on Options" and determined that "price changes...did not approximate the Black Scholes Model exactly." Exploiting the inefficiencies in the Black Scholes model is not possible for the retail trader due to inherent obstacles in retail trading of options. (Not to mention those strategies require deep pockets in order to arb the inefficiencies.)
The benefits of the things you described (spreads, straddles/strangles, butterflies) are well known, well understood, well documented strategies.
as long as he dosent read numnut's mistruths bullcrap...if you asked him somthing simple like what happens to a delta as vega increases...he would shit in his pants....but numnuts is an expertOriginally posted by JayK
Still, the retail trader is able to use several well understood methodologies (e.g., spreads, straddles/strangles, butterflies, etc) and target a decent return while risking very little. Not to mention the benefits of (delta/gamma) neutral strategies. Options trading is full of opportunities, for traders with all sizes of trading accounts, if you know how to find them and manage them.
...yes an expert in publishing bad information