New invention for the derivatives market - How to profit of it?

[Overnight]

This coder guy is hilarious. What a moron.

Boo, that's all we get? A charitable little insult? When you have time, get into the guts of it and explain to him in detail why it would not work or is irrelevant.

If not, I'll take Suntrader's answer..."These go to eleven."

 

[thecoder]

Think of it this way. At higher volatility levels and/or lots of time left to expiration, a stock with a price of $100 is equally as likely to rally to $200 (double) as it is to drop down to $50 (cut in half).

Correct.

Or a $1 stock is just as likely (same probability) to drop to zero ($0) as it is to rally to $10 at very high volatility levels.

Not correct. It should be $0.1 instead of $0.

 

[thecoder]

.

This post of mine is incorrect. My intuition was that since the payout on his "FairPut" is K^2 / S[T] - K, a little middle-school algebra applied to the log-contract formula would account for the convexity adjustment and give a reasonable price. This turns out not to be true.

My next intuition is that a FairPut is just a call on S inverse. So a FairPut on EURUSD is a call on USDEUR, but paying out basis EUR.

My definition of FairPUT is that it's the exact mirror image of CALL.

 

[Same Lazy Element]

This thread is priceless!

 

[xandman]

The reality you represent is dissonant to my own. Therefore, I reject your reality!

 

[newwurldmn]

Because this is nor a PUT but a FairPUT.
For FairPUT spot 80 corresponds to +0.743812 SD at the other side from the strike, meaning a spot of 125.
Yes, it takes some time to grasp this simple stuff...
Have you still not understood the fact that FairPUT is simply the mirror image of CALL?
Take yourself a look into your recently posted lognormal distribution graph, the right side of the mean can go to infinity, so has the left side to be mapped accordingly, but only down to 0.

Here's the result for the upper side corresponding to spot 80, ie. for spot 125:
CALL   : Payout=25.000000 Profit=13.076462(109.67%)
PUT    : Payout=0.000000  Profit=-11.923538(-100.00%)
FairPUT: Payout=0.000000  Profit=-11.923538(-100.00%)

how would one synthetically replicate it using vanilla products?

if you can’t do that then the product will fail as it’s unhedgable and no one will make markets in it.

 

[thecoder]

how would one synthetically replicate it using vanilla products?

if you can’t do that then the product will fail as it’s unhedgable and no one will make markets in it.

I'm sure it can be hedged.
There are many meanings of "hedging". I assume you don't mean Zero-Delta-Hedging, or do you?
Can you please give an example of the one you mean (ie. the currently used hedging method, that you mean)?

 

[newwurldmn]

I'm sure it can be hedged.
There are many meanings of "hedging". I assume you don't mean Zero-Delta-Hedging, or do you?
Can you please give an example of the one you mean (ie. the currently used hedging method, that you mean)?

I mean it can be replicated with other instruments.

otherwise the pricing will be all over the place and no one will want to make a market in it.

 

[thecoder]

I mean it can be replicated with other instruments.

otherwise the pricing will be all over the place and no one will want to make a market in it.

I assume you mean the hedging an option writer usually does (or should do ), right?
Or do you mean hedging a long position?
I must admit I'm not an expert in synthetics, though I know some such methods, but as said not extensively yet. Will need to study them further.

 

[thecoder]

@newwurldmn, does this answer your question? :

Synthetic Short Put
"A combination of owning stock and having a short call position on that stock
essentially has the same potential for profit and loss as being short on puts."
(https://www.optionstrading.org/improving-skills/advanced-terms/synthetic-positions/ )

For FairPut the same mechanism applies, though here of course FairPut is used instead of normal Put,
ie. then it's called "Synthetic Short FairPut".