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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (9451)	6/22/2007 10:01:45 PM
From: DMaA	Read Replies (1) \| Respond to of 24758

Are we speaking about Buddhism? but he's also enlightened.

To: ahhaha who wrote (9451)	6/23/2007 12:22:49 PM
From: ahhaha	Respond to of 24758

the next option is the most difficult... engage him and take your lumps and learn a great deal.? Quite correct. For example, I said, "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." Lump 1: Assume this is correct. What does it imply? Start with the BS option model for the call option: Call = Pf - Sexp(-rt)g Look up call prices in some time frame, say, every day for two weeks. Then input the similarly available values for P, stock price, S, strike price, r, interest rate(avg Tbill for that period as decimal, 5% = .05), t in days to expiration as a fraction of years. Next, using the probability density functions, f, g, f = (ln(P/S) + (r + v^2/2)t)/vt^1/2 where v = volatility g = f - v*t^1/2, solve for v. Each market call price for each day will give a different v. Average the v's. Using this v go to another series and compare model predictions for call price vs market price. All of this can be easily done on computer once the algorithms for f,g are put say, on a spreadsheet. One can use variation of parameter v, v + dv, to assess call fluctuations. Let dv = v/10. See whether variations keep market call price within minimum price change allowed. Using this methodology one can figure out whether it's worthwhile to spread against the fluctuation. Almost always it isn't. Markets are efficient. Well, what are we doing here? The usual idea is to compute a v and then input that into the model to get an option price. v is usually computed by taking stock prices, computing standard deviation, and then using the standard deviation as v. The choice of the function, stdev, is arbitrary. The idea is to get some fluctuation size from a time series. If we do this for some stock and some local set of stock prices in order to get a model theoretic option price, does it make sense then to apply the computation to actual market option prices? This assumes the past v is adequate for the present v, and that certainly wouldn't hold true unless expectations for future price are equal to past price. This wouldn't be true if FED suddenly and unexpectedly cut interest rates. We would then have to adjust our v upward. Similarly, if the market acts as though it might go up to Wollanchuk's high in the sky, v's will persist locally on the irrational high side. It is irrational to expect Wollanchuk's high in the sky, at least in the sense that its expectation should be reflected in today's action. For some reason some options express that Wollanchuk is right. It may be due to the way v is occurring in the market today. v is both small and large simultaneously, and historically, this only occurs before some homongously large up move. I have characterized this v state as "the market corrects all up and down excess within several days and thus the market is always in a neutral state". By the way, this is what occurs when the money markets are free to price money without authoritative intervention. We have this situation now, not because FED stays out based on right principle, but because the ROW is creating world cash at a rate greater than it can use over the long run. Over the shorter run world cash still goes into squeezes as projects suddenly and unorchestratedly put more instantaneous demand on world cash than is instantaneously being factored back into the money market pool of loanable funds. These squeeze states which provoke the Gartman bears don't last if only because demanders back off in fear yet the flow of world cash continues as the results of past projects are harvested.