Strategies with Options - Discussion

Listened to this guy on a podcast last night.

http://www.amazon.com/The-Intelligent-Option-Investor-Investing/dp/007183365X

http://www.intelligentoptioninvestor.com/

http://intelligentoptioninvestor.co...e-Essence-of-Intelligent-Option-Investing.pdf

I think it might be worth a read.

Do options prices (equity index/stock or currency) embed certain reasonably permanent biases to fair values?
If so, where? Why?
If where is known, what strategies are perceived to be most suitable to exploit these for a risk neutral investor?

TIA

DeepState said:

Do options prices (equity index/stock or currency) embed certain reasonably permanent biases to fair values?
If so, where? Why?
If where is known, what strategies are perceived to be most suitable to exploit these for a risk neutral investor?

TIA

Click to expand...

There used to be a fairly consistent and reliable overvalue of option on indicies and certain stocks of megalithic capitalizations (eg JP Morgen).... on face value. In reality they were pricing in fat tailed distributions... IOW black swans.

Not very common these days with the preponderance of retail traders believing that short option strategies are a wealth panacea, aided by the seminar industry.

BY the way, "fair value" is such a nebulous and fleeting concept as to be worthless. Realized values henceforth can deviate wildly from any notion of fair value today.... which can only be speculated on.

wayneL said:

1. There used to be a fairly consistent and reliable overvalue of option on indicies and certain stocks of megalithic capitalizations (eg JP Morgen).... on face value. In reality they were pricing in fat tailed distributions... IOW black swans.

2. Not very common these days with the preponderance of retail traders believing that short option strategies are a wealth panacea, aided by the seminar industry.

3. BY the way, "fair value" is such a nebulous and fleeting concept as to be worthless. Realized values henceforth can deviate wildly from any notion of fair value today.... which can only be speculated on.

Click to expand...

Glad you are back.

1. Was that pricing ultimately too high on a risk neutral basis?

2. Is that at both wings?

3. Almost all security pricing involves risk and uncertainty. It would be a total freak if IV matched outcome. Yet, are you of the belief that assessment of any fair value is impossible? That there is no figure for IV, no shape in the smirk, no fold in the IV surface... that would make an investor think that there is a probabilistic gain to be had?

Essentially, if I take this literally, the argument seems to be that the outcomes are so uncertain that no pricing can be ascertained as reasonable or not (fully uncertain), or that current pricing is efficient (can't make money from the market, it's too accurately priced on average through time). You were a heavy and highly informed poster on options threads previously. This suggests you once saw things differently (assuming knowledge was gained for purposes of profit/risk-management rather than pure curiosity), so I am curious for your experiences that led you to this point - but only if you care to expand.

In any case, thanks.

You still get the smirk of course, just not as much fat in it as there used to be.

In my opinion the nature of stock markets have changed due to covert manipulation via bot trading and manipulation of money supply such as QE and mass access to "information" via the Internet. Not a conspiracy theory just a fact as I see it. Therefore the nature of risk and its pricing is different.

That said, we (usually) take a bet on volatility when when play with options. Fair value is our individual perception of future realized volatility and cannot be objectively measured. I one believes an option is not trading at fair value and forms a strategy on that basis, you are betting that the market is wrong.

It often is, but it's a bet not an objective measure. You are also betting on the magnitude of directional movement or lack thereof. You can get your vola bet right or wrong, but a grinding unidirectional market will make things more interesting.

These days I have more success betting of direction/non-direction with vola the deal maker or breaker.... with robust defense mechanisms. But... my circumstances are different now that I don't ride the screen all day.

Just my $0.02

wayneL said:

In my opinion the nature of stock markets have changed due to covert manipulation via bot trading and manipulation of money supply such as QE and mass access to "information" via the Internet. Not a conspiracy theory just a fact as I see it. Therefore the nature of risk and its pricing is different.

Click to expand...

Thanks again.

What changes have you observed in the market dynamics as it pertains to options?