"Trading as a Business" quant interview, highly recommended

Quote from asiaprop:

fool, the market prices options exactly according to BS and then makes adjustments for skew, fat tails, and the like. There are a few French models out there, one of which was developed by a whale at the Deutsche index options desk in NYC but I dont wanna go into depth o tn that. Fact is BS has since its introduction been extensively used, everyone knows its shortcomings and everyone works around it because there simply are very few alternatives.

You cannot model rare events nor can someone with whatever amount of work experience predict rare events. You use the models until you get to the points where you know the models dont hold and then you manage risk in "manual" mode (meaning most of the time risk reduction) until the storm is over. Simple as that. Thats how some guys struck it rich. Other, more impatient natures, frequently blow up, get fired, suck the tits of head hunters and get their new job. Thats how it works and no politician nor crisis is gonna change that...
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If you use Black-Scholes to price options and then make adjustments for the prices you don't like - then you are not using Black-Scholes.

To illustrate the point, let's work on a fictional concept we shall call "FPM" - or "Fair Penis Measurement".

Let's say I produce my FPM by following the strict rules. Take a calibrated ruler, place it at the base of my penis and then take a reading at the furthest point my penis reaches along the ruler to produce a measurement of 10.5 inches. That gives me an FPM of 10.5

Then let's say another fellow, yourself for instance, does the same thing. You aren't happy with the measurement of 3.5 inches, so you decide to break off the first 5 inches of the ruler and start again. You now give yourself an FPM of 8.5.

In this case, although we followed a similar process, you did not adhere to the rules of FPM and therefore your FPM of 8.5 is invalid.

Similarly - increasing the volatility input that goes into Black Scholes on the outlying options to produce a more acceptable output is not using Black Scholes at all which requires the same volatility input to calculate all strike prices.

Now - call me a fool again... :)
 
Quote from asiaprop:

If you still did not get my point then maybe its you who has an issue not me. Ever thought of that?

Last hint: Leave out science and quant research, they really have no place nor are they responsible for anything in financial trading. I have come across pretty much every quant writeup of every major bank and have not found value in it a single time. It makes me shiver when a quant tries to tell me to trade a vol spread between two completely uncorrelated underliers simply because it has blown out vs its historical range. (example, SPX vs Taiwan Index vars spread)

My point all along was that quants help to create and maintain models to price derivatives. Thats all, not more, not less. How much risk is taken is solely determined by the trader/trading desk. A discussion to find responsibility in the quant crowd for anything related to this blowup is nonsense. Which part did you still not understand about my point?
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I think we can safely say that quants should not be used to help create and maintain models to price derivatives.

We can say that based on the real life experience and the outcomes of people relying on their models.

If you maintain that this is all quants do (and I do not agree with that), then shouldn't we just get rid of them altogether ?
 
Quote from pedro01:

Spot on with point 2 & 3.

I still have an issue with point 1, especially when people go around winning Nobel prizes for flawed mathematical theories. You can't blame someone with a Phd in physics for taking a 6 figure salary for an investment house.

Can we at least have quants take equal blame with the people that rely on their flawed risk assessment models ?
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But, pedro, this just tells me that you don't appreciate how scientific method works...

The fact that a particular theory has been shown to not work in certain settings doesn't mean that it has no merit. It certainly doesn't mean that its authors don't deserve their accolades. Or do you think Newton, Maxwell and Darwin, for example, should all be forgotten? Should we consider their contribution to science null and void, just because modern science has moved on?

The point is that seminal theories, like Black-Scholes, are stepping stones. They may be flawed in a whole variety of ways, but they advance our understanding of the world and allow others to build upon them.

As to the blame, you'd have to be more specific. I certainly don't see how anyone could blame Black-Scholes for anything. Everyone and their mother knows about the various flaws of B-S, which is precisely why so many next-generation models have been developed. Who else would you like to blame? David Li, whose name I hear mentioned a lot?
 
Quote from Martinghoul:

But, pedro, this just tells me that you don't appreciate how scientific method works...

The fact that a particular theory has been shown to not work in certain settings doesn't mean that it has no merit. It certainly doesn't mean that its authors don't deserve their accolades. Or do you think Newton, Maxwell and Darwin, for example, should all be forgotten? Should we consider their contribution to science null and void, just because modern science has moved on?

The point is that seminal theories, like Black-Scholes, are stepping stones. They may be flawed in a whole variety of ways, but they advance our understanding of the world and allow others to build upon them.

As to the blame, you'd have to be more specific. I certainly don't see how anyone could blame Black-Scholes for anything. Everyone and their mother knows about the various flaws of B-S, which is precisely why so many next-generation models have been developed. Who else would you like to blame? David Li, whose name I hear mentioned a lot?
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Actually, I understand how science works.

I understand that science could not come up with a masterpiece like Da Vinci.

I understand that a Physics Phd couldn't run a fruit and vegetable stall like a 50 year old cockey 'barrow boy'.

I understand that neither a biologist or chemist could have created the peach flambe.

I understand that financial academics got frustrated at following the world of finance and so created the myth that the markets were a problem with mathematical solutions so that academia could be seen to lead the world of finance.

So far, this has failed.

Finance is not a science.

In physics, academia will lead the way. In art, fashion and finance they will lag
 
Quote from pedro01:

Actually, I understand how science works.

I understand that science could not come up with a masterpiece like Da Vinci.

I understand that a Physics Phd couldn't run a fruit and vegetable stall like a 50 year old cockey 'barrow boy'.

I understand that neither a biologist or chemist could have created the peach flambe.

I understand that financial academics got frustrated at following the world of finance and so created the myth that the markets were a problem with mathematical solutions so that academia could be seen to lead the world of finance.

So far, this has failed.

Finance is not a science.

In physics, academia will lead the way. In art, fashion and finance they will lag
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Well, we'll have to disagree on this then, rather than continue this discussion ad infinitum.
 
Quote from MaklodaSux:

Guys a joke. My old man has two masters degrees one in physics and another in materials science(metallurgy) as is 10x smarter than that clown. That guy is full of himself.
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A friend of mine has a Ph.D. in Sociolinguistic Analysis.

I showed him your message, he says you sound like a loser at the bottom of the social ladder.
 
lol, and what do economists exactly have to say? And who listens to them? People can say all kinds of crap. Fact remains that large speculative trading positions are taken by humans who are 100% and fully aware of the underlying risk. They took the risk because they knew that they wont be held accountable if the position goes south. I still dont understand where in this equation you guys try to squeeze in economists, quants, math, and whatever formulae you wanna pick...


Quote from pedro01:

EXACTLY.
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lol, I seriously suggest you stick to software development, you clearly never seriously traded options or made markets in options. Case rest!

P.S.: People referencing to penis size generally have issues regarding the same, did not know that?



Quote from pedro01:

If you use Black-Scholes to price options and then make adjustments for the prices you don't like - then you are not using Black-Scholes.

To illustrate the point, let's work on a fictional concept we shall call "FPM" - or "Fair Penis Measurement".

Let's say I produce my FPM by following the strict rules. Take a calibrated ruler, place it at the base of my penis and then take a reading at the furthest point my penis reaches along the ruler to produce a measurement of 10.5 inches. That gives me an FPM of 10.5

Then let's say another fellow, yourself for instance, does the same thing. You aren't happy with the measurement of 3.5 inches, so you decide to break off the first 5 inches of the ruler and start again. You now give yourself an FPM of 8.5.

In this case, although we followed a similar process, you did not adhere to the rules of FPM and therefore your FPM of 8.5 is invalid.

Similarly - increasing the volatility input that goes into Black Scholes on the outlying options to produce a more acceptable output is not using Black Scholes at all which requires the same volatility input to calculate all strike prices.

Now - call me a fool again... :)
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