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To: Geoff Nunn who wrote (82435)	11/26/1998 9:57:00 AM
From: Venkie	Respond to of 176387

Happy Thanksgiving Day to All... Dell will not use AMD....Mikey will stay focused...no distractions..just make $$$$$

To: Geoff Nunn who wrote (82435)	11/26/1998 1:16:00 PM
From: BGR	Read Replies (1) \| Respond to of 176387

Geoff, If E(Y) = 0, doesn't there remain an arbitrage opportunity where you sell options with expected return = 0 (ignoring transaction costs) and loan the money thus raised at the risk-free interest rate (r) with expected return > 0 (everywhere except in Japan, that is)? My understanding of B-S is that in naked option transactions the buyer parts with cash that could have earned r% and gets an asset that grows at r% on average while the seller gets cash that may be invested at r% while assuming a liability that grows at r% on average. Volatility makes the average growth of the asset/liability different from r% in individual transactions but the expected value remains r% in the long run, thus ensuring that the option market is fair. Hence E(Y) = r%. This is very similar to the future price vs. cash price relation (B-S may be used to derive that as well). Thus if X and Y represented risk premiums rather than real rates of returns your model holds. If that is true (i.e if B-S holds) strange as it may sound, risk premium being 0, options are risk-free by definition. As the Wall Street saying goes, there are no rich and old option players - it is a wash in the long run. IMO, options traders can only make money from spotting mispriced options based on implied volatility and fundamental analysis. -Apratim.

To: Geoff Nunn who wrote (82435)	11/26/1998 1:26:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

Geoff, first, have a happy Thanksgiving. Back to options. I agree with everything that you said. Maybe I am incorrect, but I understood that we began this discussion with the idea of seeing high returns on writing covered calls. For this reason I considered the case of a covered call only. It seems to me that the discussion centered around whether it was more profitable to write such calls on a short-term basis (30 days), or on a longer term basis (90 days). My discussion was aimed solely at that point. I am in the habit of writing far out of the money short-term (<45 days) calls on stock that I already own. In looking at the results I discovered that I am generating about 2.5% per month in extra income (that includes the rare cases where I have had to repurchase the call on the day of expirey). This does not include fluctuations in the price of the underlying security, which I would want to hold in any case. Nor does it include transaction fees. In looking at the actual data available at the time I wrote the calls (i.e. the bid/ask for available calls) I found that the monthly return I would have achieved had I opted for 90 day writes would have fallen to under 2% per month. Not all of the data are available because some of the 90 day options would have not expired. And, as I pointed out to you in a previous post, in several of those cases I noticed that the implied volatility was greater for short-term options than for their longer-term counterparts. If the game were fair, wouldn't you expect that implied volatility be constant? New topic: Now you are certainly correct that theoretically the EV of options is equal to the risk-free interest generated (neglecting spreads and transaction costs etc.). This assumes that pricing is fair. But I believe that we both noted that pricing may not be fair. Furthermore, the plug nature of implied volatility really seems to be a rationalization of pricing rather than a predictor. If it were fair you might expect that implied volatility could be derived from beta, but it can't. Sure, we know that betas are unstable and trend towards 1.00, but what does the variability of implied volatility tell us about how fair the game is? Again, have a happy holiday. TTFN, CTC