Options pricing model

[newwurldmn]

You think that is possible? He/she trades it for a living, and I a part timer. He/she sits in an office surrounded by million dollar computer systems and I am sitting in my small kitchen using a 10 year old laptop with a discounted slow dsl line.

Maybe I am asking too much.

Absolutely possible. But you can't trade the way they trade.

In another thread, f you knew that GOOG could have moved 100 dollars then you shouldn't have sold that option in the first place (doesn't matter what the likelihood the model said).

 

[ironchef]

Absolutely possible. But you can't trade the way they trade.

In another thread, f you knew that GOOG could have moved 100 dollars then you shouldn't have sold that option in the first place (doesn't matter what the likelihood the model said).

Of course I would not trade that way if I knew GOOGL would move $100 in 1 1/2 months.

Rethinking what you said, actually you were right, I should have known. If I tested the trade with different IV (or blueplayer said expected moves), even with just using BSM, I would see that a $100 move was entirely possible and should not have traded.

Thanks.

 

[longthewings]

Can't hide the truth from you. You are correct about my lack of understanding of finance especially derivatives.

Here is my situation:

I own and traded ~10 stocks since I started investing many years ago. I only started trading options on these same stocks since 2013 and have a very modest goal: I want to do better than just buy and hold these stocks. I am quite profitable trading options but I attributed that to dumb luck as I think even a monkey can make money in 2013-2015.

So, starting about a year ago, I joined ET, and I played with Black Scholes to get a feel on how things behaved when the basic parameters changed and how pricing and outcome changed with those parameters. Knowing BSM is just a first order approximation, I am now trying to go beyond BSM to get to the next level of detail causes/effects. Any help you folks are willing to give is greatly appreciated.

What is your advice on where I go from here? Thanks again for your response.

Regards,

I would argue that it would be a mistake for you to try and move beyond black-scholes at this point. Black-Scholes has a lot of flaws, yes, but over the years a lot of tricks and gimmicks have been developed to address a lot of various issues (skew, jumps, discrete hedging, etc.). From my own personal experience as someone who tried to move on too quickly to more complex stuff (stochastic vol, jump diffusion, etc.), I found out that I was far more effective as a trader when I returned to Black-Scholes and learned it inside and out. It's still a remarkably robust model that should not be discarded so quickly, in my opinion.

 

[ironchef]

Longthewings,

You are right come to think of it.

What I need at this stage is not precision but a good understanding of the interrelations/interplays between various parameters, what they represent and how they relate to the underlying. It is very well suited to do what ifs and establish strategies.

I am just in the process of understanding blueplayer's write-ups and I think I can just use Black Scholes to analyze his positions on returns vs time vs expected moves.

Thank you for the advice.

 

[kcgoogler]

How do you incorporate fat-tails in a model?
.

Its not just fat tails ironchef; but more to the point that the financial time series as opposed to the data series that usually show up in physical sciences is non-stationary. So it simply cannot be modelled - to any degree of certainity. So the simple fact is all models are approximations which will all fail at different times.


HTH!
-gariki