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Politics : Formerly About Advanced Micro Devices
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To: Petz who wrote (107977)4/26/2000 3:33:00 PM
From: Joe NYC  Read Replies (2) of 1570333
 
Petz,

Basically, what you just proved is that market forces will keep the actual prices of calls and puts close to their theoretical values according to Black-Scholes valuation. (BTW, the call price=the put price PLUS interest)

You are right, that's what I meant.

But if I somehow KNOW that the price of AMD is based on the following formula:

AMD(N+1) = AMD(N) + R + a*AMD(N), where a>0, and R is a random number with zero mean,

You are right. But the difference is that you are a trader and the market maker is ... market maker. You bet that stock moves certain way, the market maker obliges you, sells you the position, makes a small amount on the spread and hedges the position, so that he is not carrying any risk. You can win if you are right. The market maker always wins. He is like a cook. He buys the ingredients and cooks an option for your consumption. His price is based on the price of the ingredients, not on how healthy the meal will be for you.

Joe
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