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What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

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This isn't really correct at all, for at least two reasons:

1) If you had the opportunity to flip a coin, and would recieve $2million for heads, and nothing for tails - or could take $999k guarenteed - which would you take? Just because most people would take the $999k guarentee, doesn't mean the flip isn't valued at $1million.


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The flip is certainly NOT valued at $1mil by these people. Its EV is $1mil. There's a difference.

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2) Presumably it takes a while for market price to reach IV (if ever). So while there may be 'value' in the stock, it will take too long to extract it, such that you could get better value elsewhere

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Which means that the cash is more valuable, hence, the investment isn't worth as much as the cash.

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Finally, I'm pretty sure the main reason why we pass up the purchasing of a $50 share with $70 IV is because we are hoping to find an even better bargain. We aren't choosing a $70 IV over $50 cash, but rather waiting to find $80 IV for that $50 cash. So it's really choosing $80 IV over $70 IV.

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If $50 in cash can buy $80IV and $80IV is more valuable than $70IV, then $50 is worth more than $70IV.

It's simple economics. When you can have A or B and you choose A, you're expressing a view that A is more valuable than B.