Re:GameStop Is Rage Against the Financial Machine
by dannyw on Wednesday January 27, 2021 @12:16PM
(#25930809)
What I mean is you cannot make directional predictions of a stock from option prices. The information just isn’t there. The same way you can’t use long dated futures. Because S&P 500 futures (during regular trading hours) will always be the current price, modified by the financing cost. There can never be a directional prediction, because all directional predictions get arbitraged away into the current price.
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Re:GameStop Is Rage Against the Financial Machine
by ISL on Wednesday January 27, 2021 @01:51PM
(#25932191)
I've had more time to think about this now -- it would appear that directional prediction can be arbitraged away in a world where the future cannot be known. In general, however, through research, one can begin to divine a glimmer (or more) of the future direction of the underlying.
In that situation, someone with a reasonable guess at the future could absolutely murder uninformed arbitrageurs, right? It is my expectation that "correct" pricing of the options should fold in information about both the expected volatility and the direction of the underlying.