Alice, if I were a market maker in options, you can bet that I would
be using my Black-Sholes model all day long, and that I would be
plugging in the volitility figures, etc. If the option price for
a call dipped too low for a moment, I would buy the option (and sell
the stock!) If the call price was too high, I would sell the option,
(and buy the stock). And I would make money no matter what the stock
did.
Let's face it. You can't buy an option at the theoretical price
because the market makers set too wide of a spread. Therefore, the
spread is relevent, too. What we are talking about here is not using
theoretical prices to arbitrage. We aren't even talking about using
options for hedging. We are talking about speculation. Speculation
as to the future of industries, and as to the future of specific
companies. If you are speculating, the accuracy of your crystal ball
is extremely important. Also, speculators are really gamblers, and
frequently lose all of their money if they are wrong.
Carl |
