I’ll now review the more coherent passages:
What happened to the subject matter? That is, the false claims you made that you said you'd defend?
You can’t reprice options already sold, at least not in the world I live in.
Here are your claims:
1. What he's saying is the conventional normal curve based models underestimate the occurrence of extreme events leading to a mispricing.
2. "Probability doesn't matter" means the chance of a payoff is small but not as small as conventional calculations predict.
3. His comments about ATM options agree with my own research: index options are generally overpriced ATM but often less so for individual stocks.
4. Option buying does not inherently have negative expectation as you claim
I refuted each of them.
Please tell me how "repricing options" has anything to do with the issues at hand, or, have anything to do with anything. It's clear that what you're doing is what you claim I'm doing. You're trying to run away from your false claims by obfuscation.
Do you actually understand what options are and how they work?
I was an ROP and a PSEO market maker. Further, I was a mentor for floor newbies for Coast Options. Also, I was a broker for Starr-Kuehl who specialized in options making. On the academic front Merton used my development of the stock dynamic and bond dynamic ideas derived from thermodynamics to compose his diffusion equation model.
What you have written is akin to saying that insurance companies never have losses because in case of disasters they raise the premiums afterwards!
No, it isn't akin. When daily chaos on the floor subsides market makers end up referring to the model predictions and abandon the floor's intraday determinations. In the early days that wasn't so much the case because few trusted the models. Since then the models have become the equivalent of a dictionary. The insurance companies may raise premiums after a storm but actuarial realities as determined by long term equilibrium and competition force them to lower them. In the options market the asymptotic reality is reached almost in one day. Each day is a new one unconnected to artificial fears generated by the news flow of the previous day. If you have any experience, you should realize that and realize that it refutes your claim #3.
This is truly bizarre.
I can't help your lack of comprehension.
Taleb’s main observation was that the normal curve was a misplaced model for extreme events.
Didn't you read that I said referring to Taleb, "Specifically, if many OOMs are bought, the return on some few of them will exceed the many's initial cost" ? Your so-called misplacement is at the crux of the matter. To agree with Taleb is to affirm your fallacy #4. Just think, if #4 was true, you could reliably beat the options market, and all market makers would necessarily go broke.
Though you seem not to realize it you’re actually agreeing with my point!
Another attempt to escape by obfuscation?
Option MMs make money from the spreads just like any other MM.
I see you don't know where the juice is. When I was a market maker I didn't make diddly on spreads. What I did mostly was sell options against long/short stock, but that isn't how I made the dough( I made it by obeying the annunciator board when it called my number). Why did I do that? Because your claim #4 is overtly false.
You seem to be confused about who sells options; it’s not in general the MMs but institutions and other individuals.
Just what makes you think I've been confused? And just where did I imply who sells options? Who doesn't matter in the slightest. In any event market makers execute for institutions. If a public order is called down to me, and it's a sell, I'm forced to buy but I can sell the underlying against. Makes no difference to me and I can sell the long option in the crowd if I wish to another MM who is buying for the public. 95% of the action in options is generated by speculating amateur public players.
The same pool as the sellers in fact though they might tend to be more sophisticated and there are more restrictions.
Pool? Sophistication? More restrictions? What's all this obfuscating gibberish? You are talking with a very experienced pro, not to another SI clown.
That’s why BTW Schwab is pushing option buying; they’d be happy to take commissions on selling options too but most of their customers are not authorized.
I said the brokers like Schwab try to shoe horn their customers into playing options, and I said that because it demonstrates that your claims, #1, #3, #4, are false. Why else would the brokers be confident that their correspondent MMs wouldn't go to ruin from the mathematical complement, negative expected return, of your assertion of claim #4? The game happens to work in a way so that MMs enjoy the positive expected return. It's a zero sum game. Thus, your claim #4 is inherently false.
If option buyers systematically lose as you claim then equivalently option sellers would systematically win before trading costs.
That's exactly right. Else, no one would make a market in options because they could expect to go to ruin. I tried to convey that elementary idea with my Lost Beggas figure.
Sign me up if that’s the case but in a (fairly) efficient market of course any inherent advantage would be arbitraged away.
A perfectly efficient market maximizes the negative expected return, the loss, to a buyer of options. Efficiency is achieved under stability and stability brings about convergence to model prediction.
In fact it cannot be stated that there is an inherent advantage to buying or selling except in certain cases which I'll go into below.
As I said previously, time deterioration makes buying options inherently disadvantaged.
There ARE some patterns that exist outside of chance but certainly not as crude as “all buyers are losers” as you claim.
I claimed that buying options has a negative expected return, contradicting your claim #4. You say you have a prob/math background, but you couldn't given your misunderstanding of how expectation works. As for, "There ARE some patterns that exist outside of chance", every option buyer believes this illusion. "Chance" encompasses the universe of possibilities. You would know that had you taken the second term of statistics.
One of the tendencies that persist despite arbitrage because of inbuilt psychological bias is the overpricing of index options (especially ATM) versus their component stock options.
You're wrong again. Arbitrage doesn't bring market pricing into model alignment. Arbitrage tends to iron out market inefficiencies. Nothing to do with option pricing which already reflects these changes. The inherent nature of option pricing exists in arbitrage sides independently of fluctuations away from equilibrium. Indeed, the dynamic of say, the BS model, exists in the fluctuation! The reason is due to the fact that options models are built on natural stochastic processes. Transition from one stochastic state to another must proceed according to the constraints on natural processes. The players think that psychology is causing model - market divergence, but psychology is intraday transient, and relaxes by the next day's opening, when the model asserts itself again and the crowd unknowingly complies. If you had any sophistication, you would have seen that I already stated this previously in a more succinct way.
This is probably because whereas individuals might sell options on individual stocks they’re less likely to do so with the indexes (much more likely to buy puts) so leaving it to the institutions to do so.
No. There's no "mispricing" in index options. I'll ask again. How do you know they're "mispriced"?
I hope you’re able to understand then how index option prices would be higher everything else being equal.
You are hoping that I would go along with your falsity? You haven't shown why you think index options are "overpriced". There's no way that you could.
If I remember correctly the process by which this is arbed by hedge funds is called “diffusion”.
Speaking of obfuscation, how does this (false, and incoherent) claim fit into your general rambling? Let me define diffusion: random walk.
Another is the under pricing of far OTM (this is the usual notation BTW not your “OOM”) because of the aforementioned flawed pricing model and a principle of behavioral finance (very rare events become assumed to be impossible).
Behavioral finance? What are you? A charlatan? The only flaws are in your mistaken ideas about how things work.
Taleb talks of this here:
You should review what Grace said about Taleb. The guy is a charlatan who has no clue, and tries to trick people into given him money based on pseudo science.
”More empirically, an occasional sharp move, such a "22 s event" (expressed in Gaussian
Terms, by using the standard deviation to normalize the deviations), of the kind that took
place during the stock market crash of 1987, would cause a loss of close to 6,000 years of
time decay for an out of the money option, and more than a year for the average option.”
I already addressed this mistaken idea. There are no regimes of positive expected return in option buying unless you want to grow horns on your density function. In that case your density function isn't one that can be identified with any process in universe. It would be a violation of mass - energy conservation because it would say there's a way to get something for nothing.
Famous traders who went broke selling options include Mark D Cook and Niederhoffer.
When they're going down in flames, they try to lay down covering fire.
I could go on but I see I’ve spent too much time on your nonsense already. Perhaps I should have taken someone’s advice and just put you on ignore.
Consider all the recs you have received. You like psychology. Apply the Theory of Contrary Opinion. |
