OTM puts with respect to black swan

xflat2186 · Jul 3, 2007

Again if they were over priced or under priced the WORLD would step in and price them correctly.

If its your opinion they're priced wrong thats fine, then please indicate what the correct pricing is and explain why?

The âworldâ would say theyâre priced correctly being that no one steps in and moves them.

daddy'sboy · Jul 3, 2007

I always assumed that the 'correct' price was the premium that a buyer and a seller agreed on for the transaction to be consummated. Obviously each of the participants in the transaction thinks he/she is right in their point of view - those views being opposites in that one believes the security is undervalued (the buyer) and the other believes it's overvalued (the seller). Then the market does its thing. Whether the security was 'over' or 'under' priced is thus only evident in hindsight.
db

rosy2 · Jul 3, 2007

Quote from xflat2186:

Again if they were over priced or under priced the WORLD would step in and price them correctly.

we have different views. you are an efficient market guy and I am not.

xflat2186 · Jul 3, 2007

Fair enough rosy2.

Could you please tell us then how if these options are not priced correctly why the world does not swoop in and do it correctly? Can you select .... say a SPX put thats priced wrong for an example and tell us why its wrong and tell us the correct price?

opt789 · Jul 3, 2007

Quote from xflat2186:

Fair enough rosy2.

Could you please tell us then how if these options are not priced correctly why the world does not swoop in and do it correctly? Can you select .... say a SPX put thats priced wrong for an example and tell us why its wrong and tell us the correct price?

Wow that's not a loaded question or anything. You will get an answer to that the day after never. While you're at it could he also tell us the "correct" religion and the "correct" unified theory of the universe?

These discussions become much more about semantics than anything else. An option is priced correctly if it is line with all its synthetic and arbitrage equivalents. Anything else is simply your opinion of where one or more of the option's stochastic component inputs are headed.

rallymode · Jul 3, 2007

Quote from xflat2186:

Fair enough rosy2.

Could you please tell us then how if these options are not priced correctly why the world does not swoop in and do it correctly?

Perhaps the world is filled with efficient market believers who keep the prices at these incorrect levels which they evidently consider fair prices.

Profitaker · Jul 4, 2007

Quote from rosy2:

we have different views. you are an efficient market guy and I am not.

Ok, could you at least say whether you think outliers are overpriced or underpriced ?

rosy2 · Jul 4, 2007

its been my experience that the OTM options are a better return than an ATM or ITM. I said that the OTM options are EITHER overpriced or underpriced. There's more guess work when making a market in OTM stuff. This isn't science or exact, just an observation.

panzerman · Jul 4, 2007

Quote from rosy2:

its been my experience that the OTM options are a better return than an ATM or ITM. I said that the OTM options are EITHER overpriced or underpriced.

Even if OTM options are regularly underpriced, remeber what happened to Taleb. He bought OTM options exclusively, and still couldn't really make the strategy of Black Swans work.

If you're good at predicting short term direction of the underlying, stick to ATM or ITM options for trading vehicles. If you're not good a predicting short term direction, perhaps just stay the hell away from options altogether.

xflat2186 · Jul 4, 2007

Quote from rosy2:

its been my experience that the OTM options are a better return than an ATM or ITM. I said that the OTM options are EITHER overpriced or underpriced. There's more guess work when making a market in OTM stuff. This isn't science or exact, just an observation.

There is no guess work at all anymore, those days ended years ago. The FACT is that if those options are priced wrong then somone somewhere in the world would be making a bundle off them.

This is a moot point being that you cant offer a single answer to the questions posed or show an example.