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0 pointsvmception5y ago0 comments

Learnings from 2008:

- banning short selling during a market sell off irreparably harms the options market, exacerbating market dysfunction.

- the tail wags the dog. although equities/asset prices should dictate options prices as an afterthought, options activity often can dictate equities/asset prices.

- options market should not be ignored in policy decisions and should be made more efficient to ensure better price discovery in both options and their underlying assets.

- options market hours should be extended

- big data challenges across broker dealer firms hamper the immediate rollout of all possibilities regarding improving options contracts, the solution being incremental rollout of series and smaller quotes

0 comments

bananaface5y ago

Why would anyone assume equity price dictates options price? If there's arbitrage between the two instruments, they'll both exert a force on one another and the larger market (options) will exert the larger force.

vmceptionOP5y ago

options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

its not really about arbitrage between markets, it’s the varying motives within the options market and varying prices others are willing to pay. Although this can be influenced by arbitrage between markets for some people.

the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be

JumpCrisscross5y ago

> options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

Options arbitrage between equity and options via BSM variants is settled science. As is put-call parity, an arbitrage between put and call pricing. The latter is a perfect arbitrage—it is riskless. The former is not, there is risidual risk that must be continuously managed. (That management is another transmission mechanism for information between the markets.) When mismanaged, it blows you up. But it still enforced a tight, arbitrabgeable relationship between equity prices and options.

What does blow people up is thinking options models are B.S. and then going and trading options. They’re likely the reason my options-trading hedge fund stakes have been doing so well.

bananaface5y ago

What?

If I think stocks are mispriced, I will probably buy an option to maximise the profit from my edge. That will drive the equity market. How arbitrage is derived is irrelevant.

j / k navigate · click thread line to collapse

0 pointsvmception5y ago0 comments

Learnings from 2008:

- banning short selling during a market sell off irreparably harms the options market, exacerbating market dysfunction.

- the tail wags the dog. although equities/asset prices should dictate options prices as an afterthought, options activity often can dictate equities/asset prices.

- options market should not be ignored in policy decisions and should be made more efficient to ensure better price discovery in both options and their underlying assets.

- options market hours should be extended

0 comments

bananaface5y ago

vmceptionOP5y ago

options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be

JumpCrisscross5y ago

> options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

What does blow people up is thinking options models are B.S. and then going and trading options. They’re likely the reason my options-trading hedge fund stakes have been doing so well.

bananaface5y ago

What?

If I think stocks are mispriced, I will probably buy an option to maximise the profit from my edge. That will drive the equity market. How arbitrage is derived is irrelevant.

j / k navigate · click thread line to collapse