To: ahhaha who wrote (79837 ) 6/21/2007 10:15:39 PM From: Night Trader Read Replies (4) | Respond to First some general observations. It’s my experience that if someone can’t say what they mean using plain English then invariably they’re trying to hide something. In this case it’s your ignorance of the subject matter. You say a lot without really saying anything. Much of it as I’ve said before is self-contradictory and close to gibberish (it reads like James Joyce had he taken a semester of calculus at night school) but I’ll now review the more coherent passages: 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. 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. 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. fooledbyrandomness.com
