>Although markets are generally good at estimating the magnitude of a contingent liability, they are often poor at evaluating outcomes probabilistically. Examples include litigations, regulatory actions, or other events that create the perception of going concern risk.
>It is not too uncommon to see cases where the option market assigned normal probability distributions to situations that clearly had bimodal outcomes.
>the normal probability distribution assumption implicit in option pricing models was inconsistent with market realities.
>Often, the longer the duration of the option, the lower the implied volatility, which makes absolutely no sense.
>markets sometimes trend and that volatility will dramatically understate the potential price move of markets that trend.
these are quotes by jamie mai. A young man who turned $100k into $140 million in less than a decade of trading. He made most of his money through options.
One of his strategies is to look for events that will result in an asymmetrical outcome for a stocks price where the options market for that given stock is priced in a symmetrical way - i.e. based on historical volatility etc.
Good thread, but yes this is probably too high IQ for Jow Forums. I suspect most people on here don't even know what Black-Scholes model is.
John Miller
So you're saying I need to put/call companies that are under lawsuits for example, where the assumption is that the outcome of the lawsuit is not priced into the market, thus making my option gains exponential compared to my relative risk?
Samuel Sanchez
WE ONLY SHILL PONZI SCHEMES HERE!
Landon Hill
Yes that's one of his strategies. But the magnitude of the move tends to be priced in. What's not priced in, is the probability of the outcome. so for example, the implied volatility might be 80% which would probably be correct, but the chance of the lawsuit resulting in a positive outcome vs. negative might be more like 80/20 but options markets tend to almost always price it at around 50/50. So it means that the OTM calls are far undervalued in comparison to the OTM puts.
Another one is buying LEAPS because the IV tends to be far too low in comparison to the actual range of a move. For example, a consistent 2% gain every day for 800 days would result in a low HV yet the range of the move is huge. And because markets often trend in a single direction rather than staying flat, the longer term options are usually underpriced.
Dominic Foster
wait why is this sticky?
Charles King
>have i gotten too smart for this board? Yes
Christian Thompson
So taking that example, we could math it out much like the casino does their house edge? Regardless the outcome of the move, given we are able to keep up our volume without going broke, we will scalp an edge that comes from the 50/50 pricing assumption being loaded in our favor (as 80/20 or whatever).
Sounds like a great project for a bunch of autists to gamify with nothing to lose but their time. Slap a candy crush skin on it and make washed up soccer moms run our investment fund without being any the wiser.
As this user , knowing that the outcome is 80/20, rather than 50/50, requires you to actually know a lot about the situation, which is not impossible, but definitely isn't easy.
It probably tends to be priced in as 50/50 because people are using non-directional strategies, before the release of an outcome.
Evan White
>jamie mai. A young man who turned $100k into $140 million in less than a decade of trading en.m.wikipedia.org/wiki/Cornwall_Capital >father is stupid rich and started son's company to diversify his capital user...
