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

A much better idea would have been to put a limit/cap on the Calls so their max profit can't exceed the max profit on the Puts. So a $10 TSLA Call could be worth $10 maximum at expiration, just like a $10 TSLA Put could only be worth a maximum of $10 at expiration. If you have defined equidistant boundaries surrounding the strike (e.g $0 to $20 surrounding the $10 strike) the potential call payout would always equal the potential put payout....which would mean the ATM deltas would always be identical at any vol or DTE - the one thing you are obssessing about and what is keeping you awake at night.

You could call them "SuckaCalls"....because only a sucker would buy them.
 
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VolSkewTrader said:
A much better idea would have been to put a limit/cap on the Calls so their max profit can't exceed the max profit on the Puts. So a $10 TSLA Call could be worth $10 maximum at expiration, just like a $10 TSLA Put could only be worth a maximum of $10 at expiration. If you have defined equidistant boundaries surrounding the strike (e.g $0 to $20 surrounding the $10 strike) the potential call payout would always equal the potential put payout....which would mean the ATM deltas would always be identical at any vol or DTE.
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In my solution the probabilities for the two sides (up and down) dictate the risk/reward payout scheme, as it should be in every fair game.
For both sides (up and down) with the same probability, the reward (ie. the payout) has to be equal, ie the same...

This works not only in a normal distribution, but also in a lognormal distribution like in markets where prices cannot become negative.
The key for this to work is the corresponding same z distance from the mean, in my case from the strike K.
 
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thecoder said:
That's a correct analysis, right, yes, you finally got it! :)

Seriously: yes, that's it, and I don't see any problems with it. Things are as they are, as long as they are correct, especially mathematically correct.
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The $10 strike TSLA BSM Calls are $2,040 ITM. As a mirror image with equal payout, your "invention" would allow for the $10 strike TSLA "FairPuts" to also be $2,040 ITM.

There's one glaring problem: For your $10 strike TSLA "FairPuts" to expire $2,040 ITM (in-the-money) just like the regular BSM calls can, TSLA stock would have to be (negative) - $2,030 at expiration. Not sure if that is possible.
 
VolSkewTrader said:
The $10 strike TSLA BSM Calls are $2,040 ITM. As a mirror image with equal payout, your "invention" would allow for the $10 strike TSLA "FairPuts" to also be $2,040 ITM.

There's one glaring problem: For your $10 strike TSLA "FairPuts" to expire $2,040 ITM (in-the-money) just like the regular BSM calls can, TSLA stock would have to be (negative) - $2,030 at expiration. Not sure if that is possible.
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It's calculated differently: you have to convert the spot to the corresponding inverse spot (ie. in this case to the corresponding spot above K), then calculate that S_up - K :) That's the nice mathematical trick here :)
Of course this can't be done that easily by human mind, one rather needs to use a program or a calculator as the z value has to be calculated...
 
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thecoder said:
It's calculated differently: you have to convert the spot to the corresponding inverse spot (ie. in this case to the corresponding spot above K), then calculate that S_up - K :) That's the nice mathematical trick here :)
Of course this can't be done that easily by human mind, one rather needs to use a program or a calculator as the z value has to be calculated...
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The $10 strike TSLA calls are worth $2,040 if they expired today. So at what spot price (TSLA stock price) at expiration are the $10 strike "FairPuts" worth $2,040?
 
VolSkewTrader said:
The $10 strike TSLA calls are worth $2,040 if they expired today. So at what spot price (TSLA stock price) at expiration are the $10 strike "FairPuts" worth $2,040?
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Here's the answer (using strike 100 instead of your 10):
Code: 
Params: Spot_S=100 Strike_K=100 AnnVola_s=30% ExpDays_t=365 AnnDays_ty=365 AnnEarningsYield_r=0% AnnDividendsYield_q=0% SpotAtExp_Sx=(s.b.)

CALL=11.923538 PUT=11.923538

For Sx=2140:
Long CALL:
  LZ(const): Sx <= K(100;z=0)  POZ(var): Sx > K(100;z=0)  PZ(var): Sx > K+C(111.92354;z=0.37548587)
  LZ_MaxLoss=C(11.923538) PZ_MaxProfit=Sx-C(ie. unlimited)
  Credit=-11.923538 Payout=2040 Profit=2028.0765(17009.015%)

For corresponding inverse Sx of 2140, ie. Sx=4.6728972 :
Long FairPUT:
  LZ(const): Sx >= K(100;z=0)  POZ(var): Sx < K(100;z=0)  PZ(var): Sx < Sup-K-P(88.076462;z=-0.42321623)
  LZ_MaxLoss=P(11.923538) PZ_MaxProfit=Sup-K-P(ie. unlimited)
  Credit=-11.923538 Payout=2040 Profit=2028.0765(17009.015%) (z=-10.211303 zUp=10.211303 Sup=2140(2040%) Smid=100(0%) Sdown=4.6728972(-95.327103%)
The corresponding inverse Sx of 2140 is calculated under the name "Sdown", see above)


Update:
Here the same calc also for your strike 10:
Code: 
Params: Spot_S=10 Strike_K=10 AnnVola_s=30% ExpDays_t=365 AnnDays_ty=365 AnnEarningsYield_r=0% AnnDividendsYield_q=0% SpotAtExp_Sx=see_below

CALL=1.1923538 PUT=1.1923538

For Sx=2050:
Long CALL:
  LZ(const): Sx <= K(10;z=0)  POZ(var): Sx > K(10;z=0)  PZ(var): Sx > K+C(11.192354;z=0.37548587)
  LZ_MaxLoss=C(1.1923538) PZ_MaxProfit=Sx-C(ie. unlimited)
  Credit=-1.1923538 Payout=2040 Profit=2038.8076(170990.15%)

For corresponding inverse Sx of 2050, ie. Sx=0.048780488 :
Long FairPUT:
  LZ(const): Sx >= K(10;z=0)  POZ(var): Sx < K(10;z=0)  PZ(var): Sx < Sup-K-P(8.8076462;z=-0.42321623)
  LZ_MaxLoss=P(1.1923538) PZ_MaxProfit=Sup-K-P(ie. unlimited)
  Credit=-1.1923538 Payout=2040 Profit=2038.8076(170990.15%) (z=-17.743367 zUp=17.743367 Sup=2050(20400%) Smid=10(0%) Sdown=0.048780488(-99.512195%)

Are you convinced now? :)
 
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thecoder said:
Here's the answer (using strike 100 instead of your 10):
Code: 
Params: Spot_S=100 Strike_K=100 AnnVola_s=30% ExpDays_t=365 AnnDays_ty=365 AnnEarningsYield_r=0% AnnDividendsYield_q=0% SpotAtExp_Sx=(s.b.)

CALL=11.923538 PUT=11.923538

For Sx=2140:
Long CALL:
  LZ(const): Sx <= K(100;z=0)  POZ(var): Sx > K(100;z=0)  PZ(var): Sx > K+C(111.92354;z=0.37548587)
  LZ_MaxLoss=C(11.923538) PZ_MaxProfit=Sx-C(ie. unlimited)
  Credit=-11.923538 Payout=2040 Profit=2028.0765(17009.015%)

For corresponding inverse Sx of 2140, ie. Sx=4.6728972 :
Long FairPUT:
  LZ(const): Sx >= K(100;z=0)  POZ(var): Sx < K(100;z=0)  PZ(var): Sx < Sup-K-P(88.076462;z=-0.42321623)
  LZ_MaxLoss=P(11.923538) PZ_MaxProfit=Sup-K-P(ie. unlimited)
  Credit=-11.923538 Payout=2040 Profit=2028.0765(17009.015%) (z=-10.211303 zUp=10.211303 Sup=2140(2040%) Smid=100(0%) Sdown=4.6728972(-95.327103%)
The corresponding inverse Sx of 2140 is calculated under the name "Sdown", see above)
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I was referring to the $10 TSLA strike, but let's go ahead and use your 100 K strike TSLA "FairPut" example.

According to your calculations the 100 strike TSLA "FairPut" only needs to be $95.3271028 [100 (K) - 4.6728972 (TSLA stock price at expiration)] in-the-money (ITM) to be worth $2,040. At a TSLA stock (spot) price of $4.6728972, the regular 100 K BSM put is worth $95.3271028 at expiration...but your 100 K "FairPut" is worth a whopping $2,040 at the same spot price at expiration. Your 100 K "FairPut" is worth approximately as much as the 2,045 K regular BSM put at expiration.

When your ITM 100 K "FairPut" is automatically exercised at expiration with TSLA spot price at $4.6728972, you pocket the the difference between the strike (K) 100 and spot price. So you receive 100 - $4.6728972 = $95.3271028, just like the regular 100 K BSM put. Now where does the other $1,944.672897 ($2,040 - $95.3271028 = $1,944.672897) come from if the "FairPut is worth $2,040 at expiration?

If I was short the 100 K TSLA "FairPut" and TSLA stock was $4.6728972 at expiration, losing $95.3271028 (K - spot) at expiration makes perfect sense and is an acceptable loss. But losing an additional $1,944.672897 being short a 100 K TSLA "FairPut" does not make any logical or quantitative sense. How would you explain to someone that the 100 K TSLA "FairPut" has unlimited Maxloss potential when he or she knows that the stock cannot go below zero? Logic and normal math tells you that $100 is the Maxloss for any 100 K put. Losing anything beyond that amount does not make any logical or quantitative sense and would be a hard pill to swallow.
 
@VolSkewTrader, as said, it's not easy to understand. But it makes very well sense if you think from this point of view:
FairPUT has to give the same payout as the corresponding CALL, as it has to behave like the mirror image of the CALL.

And: an example calc also for your strike 10 I already had appended to my prev. posting.
 
VolSkewTrader said:
How would you explain to someone that the 100 K TSLA "FairPut" has unlimited Maxloss potential when he or she knows that the stock cannot go below zero? Logic and normal math tells you that $100 is the Maxloss for any 100 K put. Losing anything beyond that amount does not make any logical or quantitative sense and would be a hard pill to swallow.
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This is easy to explain: just think of the inverse, ie. why exactly that is possible with CALL?
The inverse of that is the same, even when there is a boundary of 0 present.
This works b/c of the lognormal nature of the distribution.
In all distributions the same z distance around the mean has the same probability, and with that the same distance in material value (ie. in our case monetary value).
I hope this finally is convincing as this is stochastic 101.
 
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@thecoder

You can ask or survey anyone on this forum. If you short any $10 TSLA put, the most you should be able to lose is $10. Telling someone they could theoretically potentially lose thousands or millions of dollars shorting 1 $10 Tesla put makes your product both unmarketable and untradeable.

My "SuckaCalls" idea is far better and makes much more sense. I'll even let you use the moniker.
 
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