we are obviously talking about different notions of probability. no one knows the future. prices reflect the weighted average of every market participant's opinion about the future at any point in time. i examine what the options prices are saying about probability which is mostly the prospects for future volatility. direction has nothing to do with it. you may have an uncanny ability to predict future stock movements with some accuracy. you may also have the uncanny ability to predict when a coin will land heads. your ability has nothing to do with the probability of either event. you are talking about your individual trader expectancy level or performance. but the fact remains that the if you trade options, the instruments themselves are negative expectancy vehicles for the rest of us.
Writing options for a living
- Thread starter torontoman
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we are obviously talking about different notions of probability. no one knows the future. prices reflect the weighted average of every market participant's opinion about the future at any point in time. i examine what the options prices are saying about probability which is mostly the prospects for future volatility. direction has nothing to do with it. you may have an uncanny ability to predict future stock movements with some accuracy. you may also have the uncanny ability to predict when a coin will land heads. your ability has nothing to do with the probability of either event. you are talking about your individual trader expectancy level or performance. but the fact remains that the if you trade options, the instruments themselves are negative expectancy vehicles for the rest of us.
...which has nothing to do with the probability of the underlying being higher for the upside...
Where do you get that from ?
how is that different from a directional bias. i used this example earlier in this thread. assume a stock with only two opinions. 50% believe it is worth $50, 50% believe it is worth $48. now assume opinion changes so that 90% believe it is worth $50 and 10% believe it is worth $40. in both cases the fair value consensus is $49. but if options are trading on both there would be a decided skew in case two with the put strikes showing decidedly more value (or higher IV). in this instance the risk is directional . i believe that this directional opinion is the reason for the changing IV surface.
mind you it is not a tradeable phenomenon in the sense that if put IVs are skewed you should get short an underlying. zero-expectancy at fair value still holds no matter how opinions change.
how else can you conceive of fair value in a market based system? that's how i understand supply and demand to be working themselves out. please enlighten me if i am off base here.
Taleb? From what I know, he's doing ok... probably collecting royalties from his book s
that blowup article was about victor niederhoffer. i didn't read it, coz i already read it a while ago. a few times, actually.taleb goes on his personal retirement/sabbatical every 7 years. he returns all money and doesn't do any trading except for his own, i think. i gotta search more on this. the way he plays, he really cannot blow up from what i understand.
LOL
EVERY stock or futures trader trades possible outcomes and "HAS TO" try and predict direction, that's what this business is ALL about and if you think it can't be done, well there are more then just a few people that would disagree with you and there are several real examples that we all know.
Soro's
Buffet
Paul Tudor Jones
and thousands of smaller less well know traders do it EVERY day!
If none of these men tried to predict the future price levels then trading wouldn't exist.
I understand options sellers do things a little differently BUT you still have to be right on direction or adjust so there is no difference at all between the two traders, like I said with in the beginning we are just using different models to make the DIRECTIONAL decisions.
Sheesh !
It is not a directional bias. This is basic option's pricing. Option's price doesn't depend on people's perception of upside/downside probability. It only depends on people's perception of upside/downside risk.
Options wouldn't be useful if they were a bet on an underlying's direction. Options are useful and widely used just because they allow you to play the risk on an underlying. Options are a bet on volatility.
I personally do not conceive any notion of 'fair value'.
Just to give you an example : if I want to buy, but I don't have any money and cannot get it, my opinion on the market is not included in the price...