I'm done with this clown. Like talking to a 5 year old.
New invention for the derivatives market - How to profit of it?
- Thread starter thecoder
- Start date
I'm done with this clown. Like talking to a 5 year old.
The PUTs are all mispriced as they don't give the same payout like a CALL with same params and premium.
Logic would expect that the payout should be equal for such a CALL and PUT, but there is a big gap favoring the CALL. This was already proved in another thread here, and that was the motivation for developing my FairPUT
There's no limit how much a stock can go up, but can't go lower than zero for down. So it's natural for puts to value less.
Even on indexes, let alone single stocks, let alone penny stocks which trade today at $2 and tomorrow might be $40.
WOW...
True that. No amount of logical refutation will convince a crank he is wrong. That is one of the markers of a true crank vs. someone who is simply wrong.
TheCoder has re-invented a form of log contract. But he has no clue on how to price it. Hint to thecoder: Carr-Madan. Just google "log contract Carr-Madan" and download the pdf in the first link.
Edit: see Gordon's answer to this StatckExchange question:
https://quant.stackexchange.com/que...th-payout-lnst-where-st-is-the-stock-price-at
and the links in the comments.
FairPUT is the exact mirror image of CALL:
Code:S=100.00 K=100.00 s=30% t=1.0 r=0.0 q=0.0 : CALL : Value=11.923538 Delta=0.559618 MyDelta=0.500000 Gamma=0.013149 Vega=0.394479 Theta=-0.016211 Rho=0.440382 ... PUT : Value=11.923538 Delta=-0.440382 MyDelta=-0.500000 Gamma=0.013149 Vega=0.394479 Theta=-0.016211 Rho=-0.559618 ... FairPUT: Value and other params same as CALL Call, Put, and FairPut all have the same params and do cost all the same. Now let's say the options expire at spot 120: CALL : Payout=20.000000 Profit=8.076462(67.74%) PUT : Payout=0.000000 Profit=-11.923538(-100.00%) FairPUT: Payout=0.000000 Profit=-11.923538(-100.00%) Now let's say the options expire at spot 83.333333: CALL : Payout=0.000000 Profit=-11.923538(-100.00%) PUT : Payout=16.666667 Profit=4.743129(39.78%) FairPUT: Payout=20.000000 Profit=8.076462(67.74%)
Do you see the difference in the payouts of PUT and FairPUT ?
Spot 120 and Spot 83.333333 are same standard deviations (+/- 0.607739) apart from the strike,
so both sides have the same probability to expire at these boundaries. Then of course also
the payout has to be equal (to that of CALL), which indeed is the case with FairPUT, but not with PUT.
As can be further seen, FairPUT is the exact mirror image of CALL.
Q.E.D.
So you want exchanges to offer FairPUTs with different payouts than PUTs, traders to trade them, with you getting money somehow for creating the idea.
Roseanne Roseannadanna would have said something like "Mr. Coder, you have a lot of big ideas for someone coming from Germany."
I propose a simpler solution. Instead of offering 11.923538 on the PUT, offer 9.936012280 instead. Then if the spot price at options expiration is 83.333333, the payout would still be 16.666667, but the profit would be 6.730654720 which is the same 67.74% as the corresponding CALL when the spot price is 120 at options expiration.
This simplifies the issue because you only need to find one
I've created a new & IMO revolutionary new financial instrument for the derivatives market.
It has the potential to replace another of such a currently used instrument.
But realistically seen this would take many years until the exchanges get convinced and
switch to the new instrument. So, initially the exchanges would offer this instrument as
an additional one, besides the existing ones.
The invention is basically an improvement over the Black-Scholes-Merton (BSM) option model.
It does not replace it fully, but still significantly, ie. 1/3 to 1/2 of it
But now I'm in a dilemma: how do I protect this surely once-in-a-life invention as a product, as well the algorithm it uses?
Ie. how can I make money of this invention by licensing it as a product (its trademark and the algorithm)?
One possibility would be to set up an own brokerage firm and offer that new instrument
alongside the existing instruments. I'm sure the traders would love this new trading instrument.
But, of course I don't have the big finances required for such a big endeavor.
Any suggestions on how best to proceed in such a situation?
Btw, I'm a non-US in Europe, but as we all know for derivatives the music plays mainly in the US
I'm not a professional researcher, so writing a paper and getting some fame is of course good,
but I instead prefer making some money of this idea as I'm in need of it
(Definition of a financial instrument: https://en.wikipedia.org/wiki/Financial_instrument )
Get a quant and a financial engineer to turn your idea into a financial product first and then find a dealer or a brokerage to underwrite it and market it for you.
There is no need to patent it. You just need to get it out there for people to buy it and you will make money.
Btw, nobody is forcing you to use this new FairPUT over the normal PUT.
...not yet, but who knows in a year...
I would stick to just coding. There are plenty of developers in our industry who don't have any clue about trading...yet guys who can code are what prop groups and trading firms are mainly looking to hire.
It's a nice, decent paying, cushy job without any of the stress or headaches of running a book or risk management.
https://www.ziprecruiter.com/Salaries/Algorithmic-Trading-Developer-Salary
Ok, I just tried the interesting looking formula in that link. The code snippet below is C/C++:
Code:
const double ln_St = exp(-q * t) * (log(S) + (r - s * s / 2.0) * t);
printf("TEST: ln_St=%f --> exp(ln_St)=%f\n", ln_St, exp(ln_St));
and speculatively this variant:
const double St = exp(-q * t) * (S + (r - s * s / 2.0) * t);
printf("TEST: St=%f\n", St);
Getting these results:
TEST: ln_St=4.560170 --> exp(ln_St)=95.599748
TEST: St=99.955000I unfortunately don't see how it can lead to a better calculation method for FairPut.
Do you know? Does anybody of the "experts" out there know?
Just find a bug in FairPut, if you can
.Walk the walk instead of talking the talk
Last edited:
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.