Which flaws the Black Sholes model has?

nitro said:
What would have happened if you had hedged the deep OTM call with an slightly OTM call so that you were approximately delta and gamma neutral?

Or, what if you had bought GOOG and sold those deep OTM calls to supplant income?

My point is, imo, in equities, it makes very little sense to sell OTM calls unless you own the underlying (which is then a synthetic put). On the put side it makes sense because there is usually a steep smirk and at least you are selling expensive vega. But it flattens out for calls.
More...
You are right.

Actually I did own GOOG for many years and the trade was a covered call thinking I could make some "extra profit". I did make some extra with prior covered calls but did not expect the pop in GOOG.

What is a steep smirk? Much higher IV for OTM put?

Regards,
 
ironchef said:
Good point. Unless probability move is zero any thing is possible and perhaps I was unlucky.

Regards,
More...

I'm glad you see it that way now. What you have is an implied distribution of prices (by the implied volatility), in reality there are no "probabilities" in the price itself. Just because the 1 sigma move is 20 points doesn't mean that is how the underlying is going to move. It is just a parameter of the distribution
 
ironchef said:
You are right.

Actually I did own GOOG for many years and the trade was a covered call thinking I could make some "extra profit". I did make some extra with prior covered calls but did not expect the pop in GOOG.

What is a steep smirk? Much higher IV for OTM put?

Regards,
More...
All of this stuff is available online repeated so many times it is not worth repeating it again. Educate yourself.

http://www.google.com
 
 
 
OddTrader,

I quickly scanned through all the links. They are very helpful especially the last 3. I will read through them more carefully in the next few days.

Appreciate your help.

My thought so far is that everyone knows BSM is flawed yet the brokerages are still quoting and using BSM representations. Those that are able to exploit it by knowing a better model should come out ahead?

Regards,
 
 
You must log in or register to reply here.
Back
Top