Research: new option type "Chameleon option" :-)

newwurldmn said:
how does it feel to spend so much time explaining basic concepts to him In private and then watch him publicly lambast you?
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He reached out for some assistance and I tried to make him understand the folly of his idea. I spent about 15 minutes explaining how his FairPuts couldn't co-exist with regular puts and calls. We've already proven to him in a previous thread that his FairPuts don't pass the put-call parity and synthetics test, and is therefore subject to egregious levels of arbitrage.

"I guess some people are just beyond hope. Testing his theory that BSM puts are grossly undervalued in the real market would humble him pretty quickly. Losing money would shut him up for good.
 
@VolSkewTrader, not true what you say, b/c how can FairPut be more worth when it costs the same like a vanilla Put, and when there is no change in the initial parameters of the option afterwards?

FairPut gains additional value over Put only if the parameters do change afterwards, ie. if the stock price changes or vola changes or the risk-free-rate changes or the dividend-rate changes.

But if such a change in parameters happens, then you no longer can talk of arbitrage, because that is the justly earned gain or loss, not any unjustly earned arbitrage gain or arbitrage loss.

As long as the parameters stay the same, then the outcome is the same like with Put.
 
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thecoder said:
@VolSkewTrader, not true what you say, b/c how can FairPut be more worth when it costs the same like a vanilla Put, and when there is no change in the initial parameters of the option afterwards?

FairPut gains additional value over Put only if the parameters do change afterwards, ie. if the stock price changes or vola changes or the risk-free-rate changes or the dividend-rate changes.

But if such a change in parameters happens, then you no longer can talk of arbitrage, because that is the justly earned gain or loss, not any unjustly earned arbitrage gain or arbitrage loss.
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A lottery ticket that has potential to make $100M will always be worth more than a lottery ticket with the same odds that can only win you $1,000. You'd buy as many as you can of the first one and simultaneously sell as many as you can of the second one.
 
VolSkewTrader said:
A lottery ticket that has potential to make $100M will always be worth more than a lottery ticket with the same odds that can only win you $1,000. You'd buy as many as you can of the first one and simultaneously sell as many as you can of the second one.
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And how is that supposed to be related to arbitrage? :-)
 
thecoder said:
And how is that supposed to be related to arbitrage? :)
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No one would ever buy a $10 strike TSLA regular put that has a max payout of $10, when they could buy a $10 strike TSLA FairPut with unlimited upside payout, for the same price. Your FairPuts would have to trade at a massive premium to regular puts.

Arbitrage: At the same price, the algos would buy as many FairPuts and sell as many regular puts until the price differential reflected equal or similar potential payouts/payoffs.
 
I'm just defending my position against the untruth told by @VolSkewTrader and some others.
They say this:
- In a lognormal distribution it would not be possible to have same outcome for UP and DOWN
- FairPut, as applying this, would create arbitrage
And I say, they are totally WRONG!
 
VolSkewTrader said:
No one would ever buy a $10 strike TSLA regular put that has a max payout of $10, when they could buy a $10 strike TSLA FairPut with unlimited upside payout, for the same price. Your FairPuts would have to trade at a massive premium to regular puts.
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Man, I told you this already: this is of course naturally true. But it doesn't matter b/c FairPUT is intended to replace PUT in the first place. Ie. just trash the damn PUT and see what we get then! A just option system we then get!
Arbitrage: At the same price, the algos would buy as many FairPuts and sell as many regular puts until the price differential reflected equal or similar potential payouts/payoffs.
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But this would not create any arbitrage, or any advantage for them (and: advantage over what? :)).
As said, get rid of the damn PUT, and then try to argument again...

And: just tell the audience, why your company is using for the energy sector another option system that gives for CALL and PUT the same payoff.
Why don't or can't you use BSM?... :) Of course you can't use BSM b/c its PUT does not give the same payoff like the CALL... :) Bingo!
And I'm just fixing this by replacing PUT with FairPUT in BSM... :) You should be thankful for this my effort :)
 
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