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Profitaker
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No, the dividend stream is very relevant because the index options are based on the cash. If the index options were options on futures then that is quite different, because in that case the dividends would be irrelevant because they had already been discounted in the futures price, as had the cost of carry.grantx said:
The ESX index options are based on the forward price of the cash market. Where the index options coincide with a futures expiry month then you can take the futures price as the forward price. This assuming the futures are trading at fair value, as they mostly do.
Where there are no futures to coincide with the month of index option expiry, then you need to calculate the forward price yourself (underlying - dividends + risk free interest).
New Trader,
“nothing useful in this thread.” It isn’t a question of logic (I studied logic for 3 years), it’s a question of whether you have sufficient knowledge to judge. By your own admission, you don’t.
As we can’t know everything personally, we accept that the word of those generally recognised as being proficient , eg Einstein/scientists.
You can’t make an assertion (E=MC^2) based on no knowledge – where is your legitimacy or credibility? This is nothing more than dogma or faith; all you can have here is belief. The scientists are not agreeing with You; they agree with Einstein. Do I accept it? Yes, I accept the words of those who are qualified to judge.
“Do you follow?”. Do I follow what? Statements and positions with no explanation as to their underlying rationale? No, I don’t follow. Do you? What are you following?
A contradiction (claiming to ignore Socrates but actually commenting) is irrelevant to the derivatives expertise of Profitaker and your assertion. You are conveniently expanding the context of Einstein’s quote to give credence - by appealing to authority – to your own petty grievances.
Understand?
Profitaker,
Thanks for the reply. I can see your point, but does this not imply that the Black model is inappropriate?
Will look at this again.
Grant.
“nothing useful in this thread.” It isn’t a question of logic (I studied logic for 3 years), it’s a question of whether you have sufficient knowledge to judge. By your own admission, you don’t.
As we can’t know everything personally, we accept that the word of those generally recognised as being proficient , eg Einstein/scientists.
You can’t make an assertion (E=MC^2) based on no knowledge – where is your legitimacy or credibility? This is nothing more than dogma or faith; all you can have here is belief. The scientists are not agreeing with You; they agree with Einstein. Do I accept it? Yes, I accept the words of those who are qualified to judge.
“Do you follow?”. Do I follow what? Statements and positions with no explanation as to their underlying rationale? No, I don’t follow. Do you? What are you following?
A contradiction (claiming to ignore Socrates but actually commenting) is irrelevant to the derivatives expertise of Profitaker and your assertion. You are conveniently expanding the context of Einstein’s quote to give credence - by appealing to authority – to your own petty grievances.
Understand?
Profitaker,
Thanks for the reply. I can see your point, but does this not imply that the Black model is inappropriate?
Will look at this again.
Grant.
zupcon
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SOCRATES said:
Hi Socrates
I'm genuinely shocked, by your response. Can I just make sure that you haven't misinterpreted my question ?
You originally listed a series of attributes that you (and indeed I) believer contribute to an edge.
The question that I was trying to ask was this:
Do those attributes evaporate if YOU PERSONALLY decide to buy rather than write. Do YOU suddenly become any less professional, do YOU lose your nerve, do YOU lose your power of mental arithmetic ?. I simply cant believe that YOU do. I can accept that some of those attributes might diminish, but surely tangible things such as the size of your treasure chest dosnt suddenly change just because you've decided to buy rather than write
As you and bulldozer have repeatedly pointed out, Im just a monkey sitting on the fence (and I will be until I get access to the data I need to independently verify things for myself)
In earlier posts Ive repeatedly stated that "Writers" as a group, tend have an advantage over "Buyers" as a group, simply because writers tend to be professionals. They are better funded, they have access to better pricing models, they have a better understanding of risk. They have more knowledge, more experience, better judgement, better intuition, greater funding, the right character etc etc.. Pretty much more of all of the things in your list and Im sure that every single person on this thread would be in 100% agreement that this provides an advantage.
However that certainly dosnt necessarily mean that there's an intrinsic statistical edge. Surely that debate can only really be argued at a conceptual or mathematical level.
regards
zupcon
SOCRATES
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I forgot to mention Zupcon...SOCRATES said:
There is the fallacy that people who work or have worked in institutions such as banks, fund management, pension funds etc., tend to persuade themselves, amusingly, to think of themselves as professionals..😆 ...they are not professionals in the strictest sense of the word, they are EMPLOYEES....😆 ...these employees have to be kept on treadmills...and in order for the capitalist system to be able to do this....year in year out...for the banking and financial systems of the free world to be made to operate...according to a BELIEF STRUCTURE that has to be maintained to preserve the status quo...Of course this is not intended as rudeness or disrepect to employees of institutions...it ;is just that hey are not aware of the BELIEF STRUCTURE to which they belong and are firmly embedded in, and which ultimately serves to enslave them in their thinking and ultimately :cheesy: in themselves.
The glue that is used by the pupeteers to operate the puppets is the myth that all of this operates according to fundamental principles in line with politics and economics...😕 ..which to a certain sense it does...but not for the purpose of trading effectively...which is a way of life that occupies a different universe to the one they are forced to inhabit and indeed embrace as they know no better...😕 ..no...not exactly...😆
Now the next time you are on a train in a carriage with commuters on their way to or from the City of London, for example, observe the readers of financial newpapers...when they are reading...they are frowning...why is this ?:cheesy:
The reason is that what is printed does not fit with the reality of what happens in markets.
Therefore for them, poor souls, there is a continuous subconscious subliminal battle going on inside their heads as to what's what.🙄
Some, if not all that confusion splills on to these boards.
As a consequence of this we have several dinosaurs here persistently arguing in terms of fundamental principles which do not apply...also this is the reason why, when LIFFE closed its trading floor...many traders had to resort to using screens....the great majoriy could not hack it and went on to become taxi drivers and motorbike couriers😆 ...(there's a good job for you Pitscum ~ Profitaker)...😆
This is why I am not willing to engage in discussion outside the perimeter of the title of this thread, since discussion carries the risk of educating the victims of institional indoctrination as to the true path to personal and individual freedom.
i therefore submit that the true professionals are the traders who are able to trade outside the environment of institutional collective camaraderie....:cheesy: ....take them out of that environment and they are lost....and persist in boring us to tears with all this mathematical theory and fundamental nonsense...that goes on and on...but....😆 ...on the other hand one must be grateful that such obsessives exist, as they serve to be on the other side of the market.
Markets need liquidity. They need blinkiered victims. They need a constant stream of blinkered victims. We must be grateful for their participation. We ought not to grumble.
We ought to be tolerant and let them pontificate endlessly about their hobby horses, but please, not on this thread, whch is a thread for real professionals and not employees or ex employees.🙁
This thread is about whether the Writers have the edge or the Buyers. Nothing more, nothing less. All other discussions about the merit of Black Sholes or Black Holes, or even Black Swans are irrelevant and frankly, extremely tedious and boring.😆
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SOCRATES
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Ok, alright, Zupcon, all the biases for and against have been laid out earlier in this thread to show it is not an even contest.zupcon said:
Let me use a simple model:~
The public buys and consumes fruit.
Where does this fruit come from ?
It does not come and is not grown in peoples' living rooms or bedrooms is it ?
It comes from farms specially dedicated to the specific branch of agriculture specialising in growing fruit.
Now who sells that fruit ?
Supermarkets, greengrocers and fruit vendors.
Let us single out fruit vendors and the growers on the one hand and the buying public on the other...
Who is the consumer ? Yes, the public..
Who are the suppliers ? Yes, the farms in cooperation with the supermarkets, the greengrocers and the fruit vendors.
Look at this from a bird's eye view, sort of...
Who are the professionals ? The farms, the supermarkets, the greengrocers and the fruit vendors.
And who are the non professionals ? Yes, exactly...the public.
That is why "providing" is professional and "consuming" is not.
Transpose this to the market in options....who are the non professionals ? The buyers.
Who are the professionals ? The writers, the Givers and not the Buyers.
I hope and expect this simplified explanation will serve to clarify any lingering doubts you may still have.
Therefore, the Writers will always have the edge over the Buyers.
wasp
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Socrates,
A simple question if I may. Not dealing with options my ignorance shines through I'm sure but to me, my risk or margin requirements, are of great importance to me. I like to keep things to a minimum but from reading this thread, I get the impression this is not considered. The downside is unlimited until the positions come back into profit is it not? Whilst I consider which has the edge, this is an important factor IMO.
Thanks
A simple question if I may. Not dealing with options my ignorance shines through I'm sure but to me, my risk or margin requirements, are of great importance to me. I like to keep things to a minimum but from reading this thread, I get the impression this is not considered. The downside is unlimited until the positions come back into profit is it not? Whilst I consider which has the edge, this is an important factor IMO.
Thanks
SOCRATES said:
Saludos Socrates,
Being completely ignorant about options, this explanation makes me vote W, as it is explained with logic (discarding any disaster events that would obviously kill the writer, and statistically named an outlier )
My only experience with options has been as a policy maker and the equivalent is the Put that Banking Regulators write to depositors regarding deposit insurance (the grannys that keep their money in the bank, to make it clear).
1) Yep, they keep the premium
2) They have an insider advantage, since they supervise and regulate the "agents" (banks), in order to avoid the loss.
The example is not supposed to apply 100% to market traded options, but the concept appears to be the same.
saludos
Jacinto
new_trader
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jacinto said:
My sentiments exactly.
zupcon
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SOCRATES said:
Thanks for taking time to respond, its appreciated. However, in order to argue your case, you have to compare like with like.
Let me rephrase the question. In the case of a professional buyer compared to a professional writer. Who has the edge ? and WHY ?
regards
zupcon
This statement is simply not true.SOCRATES said:
I like to skydive. I've done it quite a number of times. No matter how much I know about what I am doing, jumping out of a plane at 12000 feet is still extremely high risk. Same goes with my job. I am a very knowledgable firefighter. Been doing it years and years. Every time I turn out to an incident it is very high risk.
I could give many other examples. Theoretical knowledge of a situation or activity does not in and of itself negate the risks inherent in that situation or activity. Knowledge can help mitigate or limit the risks, it can not nullify them.
Cheers,
PKFFW
From what little I know about options, nothing in your definition of an edge is the sole domain of the options writer. In fact, nothing in your definition of an edge is related directly and solely to the writing of options at all.SOCRATES said:
Cheers,
PKFFW
This is very true. Could not agree more and I say that still being an employee myself!! At least I give myself credit for being aware of the belief structure and working towards ridding myself of it.SOCRATES said:
Sorry to say but for all the times you have pointed out that this thread is about and only about and not about and such and such and so on and so, you have just as often discussed many another topic in the thread. Seems this thread is really about whatever you want it to be about at the time. I guess that is fair enough as it is "your thread".SOCRATES said:
Cheers,
PKFFW
Your analogy is fundamentally flawed.SOCRATES said:
When one buys an option it has the potential for profit. When one buys a peach there is no potential for it to be anything but a peach. In case you are going to say "but it has the potential to be a peach tree" you must remember the reasons for buying a peach in the first place. One does not buy a peach from the supermarket if one wishes to grow a peach tree. One buys it to eat.
Having said that I will work with your analogy.......
The buyer of the peach goes to the supermarket to buy a peach. He knows exactly how much it is going to cost and hence his risk is predefined and limited. He assumes none of the risk of growning the peaches in the first place. There is a chance it will be off or rotten, a chance that it will be nice and fresh and juicy and a chance it will be something amazing.
The grower on the other hand has unlimited risk from drought, business overheads, lack of demand for peaches once grown, unfair pricing from the buyers and the list goes on. He knows there is much that can go wrong and he could be bankrupt at the end of the season as many other farmers have been before him. If he has hedged his price in the markets his profit is limited. If he has not hedged then he still has a limited potential for profit as he will only have a finite amount of peaches to sell once they are grown.
Now the farmer may go 100 seasons or more making a nice tidy profit. Then in the 101st season things go wrong and he is bankrupt. While the peach buyer happily goes along to the super market and buys his peach.
So I'm wondering how this analogy proves the farmer has an intrinsic edge over the buyer.
Finally, I grew up on a farm so I do have an intimate understanding of the problems and risks of the business. Let me assure you that no amount of knowledge will stop a drought from happening as is evidenced by the worst drought in recorded history occuring in Australia now.
Cheers,
PKFFW
SOCRATES said:
I disagree that all buyers of options are consumers. The one taking delivery at the end of the line is a consumer. In your argument, all traders who buy are consumers. Not so. A tanker loaded in the Gulf will have its cargo traded many times before she gets to Europe. The orders used to say "LEFO" Lands End for orders".
Split
wasp said:
The not very pleasant aspect of this, IMO, is that if one buys a, for example, 5800 put, he has made his money all the way down to that level and he can go down to 5800 minus his option payment without losing anything. It sounds very tempting--it can't happen, can it? "Well, it could happen , but it is unlikely to while I am in the trade, right?" That is what the newcomer may be thinking. I feel that I may be able to handle one contract---don't let me get tempted, you guys!! The real trap is buying a dozen contracts, with the idea of cleaning up. The margin requirement should be the warning of what the market thinks of that argument! It is saying "You may be right, but let us hold the money,ok?
Another point is that if you cannot increase the margin requirement, if necessary, the broker will close you out, as always, just when it reverses!
Split
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Profitaker
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The two models are almost identical. In the Black model you would input the forward price, which makes the model appropriate for pricing options on futures. In the Black-Scholes model you would input the spot price, which makes it appropriate for pricing options on a cash market. However, you could input the forward price into the Black-Scholes model and set interest rates to zero and get the same results. The models are two sides of the same coin.grantx said:
Which has given me a thought – in a coin flipping exercise, who has the edge ? Is it the caller of “heads” or the caller of “tails” ? And why ?
Similarly, in an option trading exercise, who has the edge ? Is it the buyer ? Or is it the seller ? And why ?
Clearly the answer to both scenarios can be found by calculating the odds. In the case of a coin flip, that’s simple. In the case of options, a lot more thought and some maths required. Simply put, the option delta is the probability of it expiring ITM. It makes no difference whether you buy or sell a 0.20 delta option, or buy or sell a 0.50 delta option as the over the long run you will ultimately be level with the player on the other side of the trade.
A shrewd observer may well question whether the odds (the delta) are skewed towards a buyer, or a seller, or neither. Well, the delta is a function of implied volatility (IV), and therein lies the crux of the matter.
If implied volatility is higher than future volatility then the writer has the edge. If the implied volatility is lower than future volatility then the buyer has the edge. If the implied volatility is the same as future volatility then neither the buyer or seller has the edge. I suggest the screaming idiots brigade here go away and do some historical research on the above, rather than just announcing they’ve flogged a Put, expect it to expire worthless, and so the writers must have the edge LOL
SOCRATES said:
Just trying to get my head round this one (bear in mind I'm hung over as it is saturday morning)
OK so the the farmers are like naked writers? - they take on a sizeable risk but for the most part they will generally profit form their activities.
The buyers are the consumers? they pay a premium for their product.
I reckon we're still missing someone here - the market makers - how about the supermarkets are the market makers - they get to screw over both the farmers and the consumers. They can drive prices to an extent that only the farmers with deep enough pockets can survive. They can allow certain products to trade a huge premium that the general public get screwed while allowing other products to make a loss or barely cover costs.
I'll hold my hand up and say that I don't know enough about options & I'm still trying to keep an open mind but I still don't see anything that would suggest to me that writers have any sort of general edge. Analogies and a few winning trades aren't conclusive proof of anything IMHO.
Priceman
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You must be hung over mate, it's Sunday morning isn't it?DT said:
Can't comment or vote as I know nothing about options. Even though I'm very impressed with what Socrates appears to be doing (as he's making money which is the ultimate aim no less?) I am not being shown who has the edge. From someone like me who knows nothing, can I ask you to prove how and why, etc in laymans terms. It's all just too complicated for my little brain 😱
Surely there must be a profesional (please, no need to expand on what constitutes a professional) options trader registered that we can call on who does this day in day out to either agree or disagree with Socrates? If not can someone find one and ask them to come and comment!
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