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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Marconi who wrote (14625)10/14/1998 5:33:00 PM
From: Jonathan Babb  Read Replies (2) | Respond to of 18691
 
the options reflect pricing expecting a future price centered around today's closing price.

Gone was the general indication of upward pricing forward.

Hi -

Can you please explain these statements in more detail. I am currently taking the Options and Futures class at MIT and our instructor says that the stock price should reflect all expectation about future prices, that the options can not.

The present value of the expected forward price that the options predict should always be equal to the stock price (plus or minus any frictions dues to spreads).

If this were not the case, for example if the option price is predicting higher stock prices, then I buy the stock now and create a synthetic short in the future (sell a call and buy a put at the same stock price with some future expiration date) and make arbitrage profits. (Probably just like LTC :)

So the forward prices should increase by exactly the risk-free interest rate, or there is an arbitrage.

Here is a speculation - maybe with the unwinding of LTC and now several other hedge funds (also looks like DE Shaw may be in trouble as well) there is actually an arbitrage being created in the opposite direction. Maybe shorting the stock now and creating a synthetic buy in the future.

Of course the arbitrage spread is usually so tiny that a small investor can not take advantage of it, but a big fund that can leverage up (since it's an arbitrage, it supposedly has low risk) and get economies of scale in borrowing and execution could really make a killing.

jon



To: Marconi who wrote (14625)10/15/1998 5:08:00 PM
From: Joey Two-Cents  Read Replies (4) | Respond to of 18691
 
Hi Marconi,

Whats wrong with this picture? The PPI comes in a stronger than expected 3/10% (0% was predicited). AG hates inflation. AG cuts rates.

Anecdotal evidence would indicate that all hell is about to break loose. If AG couldn't wait until November what does he know or think?

The $ was down 2 yen. Will the foreigners take their money and flee negating AG's rate cut? What will the Japanese exporters and banks do tonight?

Tick, tick, tick.


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