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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Night Trader who wrote (79835)	6/21/2007 1:55:08 AM
From: ahhaha	Read Replies (1) \| Respond to of 306849

If you think you can defend your previous comments, do so. So that we're clear about your claims I will retrieve them. What he's saying is the conventional normal curve based models underestimate the occurrence of extreme events leading to a mispricing. This claim isn't coherent. If volatility, interest rate, time, strike, and stock price are input into the Merton, BS, or any other Fokker-Planck diffusion equation derived model, the EXACT price for the option will be output. Whether the market prices according to the model is another thing. It never does instantaneously, but market price always passes through the model price. That's the best that can be done when dealing with stochastic processes. The fact that market price always passes through model price is equivalent to saying the model is exact, i.e., no divergent states, and this implies that there's no "mispricing", only mistaken input parameters. The market players are the ones who move option price back to model price since they have no other means to take it elsewhere. However, even if a bunch of them tried to move the price away from the model price, they couldn't do it except instantaneously, and instantaneously is not where anyone can operate. The players who attempt to move price to some level outside of model limits find their expected return falling. Further, when unusual events like stock market crashes create chaotic conditions with stock price, no pricing technique will be honored. The market becomes fast or chaotic. Market makers are allowed to back away. No one will sell you options at the model price nor at exorbitant prices way away from model or previous stable market price. To make the claim the models "underestimate extreme events" is totally mistaken, and a major error in understanding the derivation of pricing models, for, if the five basic parameters are input even under chaotic conditions, the option models furnish the right price. Again, maybe no one will operate at that price, but it is the natural price, since the derivation of the option models are based on the principles of physics applied to the market mechanism. In equilibrium, or at asymptotic horizons, when fear driven irrationality is no longer in the market, market makers mark to the pricing models, not to the pricing in the crowd. The crowd is moved to the model. "Probability doesn't matter" means the chance of a payoff is small but not as small as conventional calculations predict. What the author mistakenly claimed by "Probability doesn't matter" is that there's some positive expected return regime that resides beyond outliers in the distribution and that the return can be captured by applying the Law of Large Numbers. Specifically, if many OOMs are bought, the return on some few of them will exceed the many's initial cost. You used the term, "normal curve". By that I assume you meant that stock prices are distributed Gaussian normal and thereby a derivative will be subject to that distribution. Well then, please tell me how your normal curve is going to grow horns. The Law of Large Numbers stamps out your imagined horns because every trial follows the instantiation of the option model stochastic differential equation solution to a value within the boundaries. To be outside those boundary values means the distribution is neither Gaussian, nor does it occur in any human related process, not even in chaos where neither human action nor option model is applicable. As for conventional calculation, the only thing I can say about that is option models represent conventional calculation. THERE IS NO OTHER. Just as there is no other law at first order characterizing how force affects mass except that of Newton. His comments about ATM options agree with my own research: index options are generally overpriced ATM but often less so for individual stocks. The guy dealt with OOMS. Market makers prefer to sell ATMs. That's where the juice is. Do you think you're going to beat them? They make a living selling to you. It's a zero sum game. Do you think that buying there has a positive expected return? Then please tell me how options MMs can make money. What you're claiming is that you can get something for nothing, or, equivalently, that Lost Beggas can keep its doors open providing positive expected return fair games. Moreover, there's no difference between index option pricing and stock option pricing after adjustments for dividends, etc. are factored in. How can there be? They're both options! Maybe you believe there's some mythical property in index options. Unfortunately, no one else can divine those imaginings, not even God. But how can you claim that ATM index options are overpriced? According to what? Certainly not history. It's almost certain that whatever you're doing fails to assign proper volatility. You haven't done the right conventional calculation. Option buying does not inherently have negative expectation as you claim Options instantaneously fall in value. They're always worth less. Did you know that that constitutes a complete refutation of your claim? Instead of figuring out why, just try regular option buying and see how your dough holds up. You are allowed to use any means legal or illegal to make money buying options. 95% confidence that you will be ruined in 30 trades. By the way, public brokerage houses like Schwab and Ameritrade put special marketing emphasis on getting people to buy options. I wonder if they think that "Option buying does not inherently have negative expectation".

To: Night Trader who wrote (79835)	6/21/2007 2:30:42 PM
From: ahhaha	Read Replies (2) \| Respond to of 306849

so come on, boy, let's hear your rebuttal. It's hard to tell if you're being serious or not; I hope for your sake you're not. Fact is, you're getting your ass kicked. I'm not offended by your insults - they're just too ridiculous. In fact they made me laugh. Show me. You won't do that because you're up against someone who can squash you. You seem to feel the need to impress people (hey you got four recs so you must have impressed some) What you do is make false claims which only show what's behind your alleged prob/math background. but for anyone with a background in what you pontificate on your remarks are almost but not quite gibberish. Show me. You have just enough knowledge to be convincing to someone with a little less knowledge. You must be convinced because you sure don't want to reply.