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#11
08-17-2007, 02:58 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
[ QUOTE ] I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options. [/ QUOTE ] The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for. [/ QUOTE ] Your assertion is false for one thing. Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk. Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living. 
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#12
08-17-2007, 03:12 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
rofl you think everyone that trades options has $100mm liquid????
pls tell me I'm misunderstanding your post
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#13
08-17-2007, 03:16 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
You obviously didn't even read my post, so obvs you did not understand it. ROFL!
You are free to sell whatever options you legally can, of course.
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#14
08-17-2007, 03:51 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
rofl you think everyone that trades options has $100mm liquid???? pls tell me I'm misunderstanding your post [/ QUOTE ] i'll help you out a bit: [ QUOTE ] Your assertion is false for one thing. . Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk. . Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living. [/ QUOTE ] NoD's old trading clients are probably not the entire market. Barron
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#15
08-17-2007, 04:08 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
[ QUOTE ] rofl you think everyone that trades options has $100mm liquid???? pls tell me I'm misunderstanding your post [/ QUOTE ] i'll help you out a bit: [ QUOTE ] Your assertion is false for one thing. . Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk. . Third, no matter how good you are at poker, you don't have NEARLY the bankroll <font color="purple"> to sell naked options. </font>Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living. [/ QUOTE ] NoD's old trading clients are probably not the entire market. Barron [/ QUOTE ] <font color="purple"> </font>
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#16
08-17-2007, 05:00 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] I required my old trading clients to have > $100mm liquid to start doing those trades. [/ QUOTE ] One of the more over the top comments I have read in this forum. I can not understand the $100m threshold here. A guy writes a 50 contracts, absolute worse case, loses 100 points per net -$500,000. Why isnt $5-10 mil more than adequate?
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#18
08-17-2007, 05:23 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
The goal of pricing options is to price them to be 0 EV. So your total EV is zero minus the transaction costs. [/ QUOTE ] Theoretically, and if you have no edge.
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#19
08-17-2007, 05:27 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
It's hard to say what causes certain options to appear more expensive than their theoretical value without knowing how the brokerage fits their model.
My guess is that they use a constant implied volatility for all expiries and/or strikes. However, this is not true. Read up on implied volatility smile (IV smile) and implied volatility skew. Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.
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#20
08-17-2007, 06:13 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price. [/ QUOTE ] What do you mean by true price if you mean something other than market price? There are too many degrees of freedom to say for sure what a theoretical value is. You've got the model itself (e.g., Black-Scholes), as well as the inputs to that model. You can only calculate a theoretical value when you assume the remaining N-1 values. That's why you can't really come up with a theoretical value of options without specifying an assumption. So there's no such thing as saying the theoretical value of a Nokia 35 call with 30 days to expiry is $X. Rather, you can only say "using a Black-Scholes model and expected volatility of V (and other observed variables), the theoretical value is $X". When you talk about implied volatility, you're simply seeing the missing degree of freedom fall out of the Black-Scholes value, but you need to remember that you're basing that implied volatility on the assumption that Black-Scholes was used to generate the market price, which isn't necessarily the case.
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