Re:The Best Investment Advice You'll Never Get (2008)
by encoderer on Sunday November 09, 2014 @01:57PM
(#8580514)
I gave you the last word and I'll stand by that, but I think you misunderstood me and I'd like to clarify this point:
The SPY is an index fund. Of the S&P500. So no, you're not saying "they're both stupid". You're saying "buy an index fund" and I'm saying, there are more sophisticated ways of doing exactly what you're advocating.
And I'll answer your questions:
1. I don't have to "beat" professionals. When you sell options, you're selling at the Bid price. The market makers are still making their few-pennies cut, because that's how their business works.
2. Option pricing is transparent. One of the multiplicands in options pricing formulas is Implied Volatility. This is a forward looking, crowdsourced guess of where the market thinks volatility is headed. It's not backward looking, that's Historical Volatility. The thing about IV is that empirically, it over-estimates. Since the CBOE first invented the Call option 20 or 30 years ago, actual volatility has been lower than the Implied Volatility predicted. And that's the edge dufer, it's an arbitrage opportunity between IV and actual volatility. There is of course no guarantee it will always be there, but it always has been, and that counts for something.
Another way to look at this is simple: People buy options for a variety of reasons. Speculation and Hedging primarily. The options market has to build-in an edge for option sellers, otherwise nobody would sell them.
Alright, I'm sorry if ever my emotions ran a little high. I love HN but the tendency to shout-down what you don't agree with sickens me a little and I have a hard time just yielding to it.
The SPY is an index fund. Of the S&P500. So no, you're not saying "they're both stupid". You're saying "buy an index fund" and I'm saying, there are more sophisticated ways of doing exactly what you're advocating.
And I'll answer your questions: 1. I don't have to "beat" professionals. When you sell options, you're selling at the Bid price. The market makers are still making their few-pennies cut, because that's how their business works.
2. Option pricing is transparent. One of the multiplicands in options pricing formulas is Implied Volatility. This is a forward looking, crowdsourced guess of where the market thinks volatility is headed. It's not backward looking, that's Historical Volatility. The thing about IV is that empirically, it over-estimates. Since the CBOE first invented the Call option 20 or 30 years ago, actual volatility has been lower than the Implied Volatility predicted. And that's the edge dufer, it's an arbitrage opportunity between IV and actual volatility. There is of course no guarantee it will always be there, but it always has been, and that counts for something.
Another way to look at this is simple: People buy options for a variety of reasons. Speculation and Hedging primarily. The options market has to build-in an edge for option sellers, otherwise nobody would sell them.
Alright, I'm sorry if ever my emotions ran a little high. I love HN but the tendency to shout-down what you don't agree with sickens me a little and I have a hard time just yielding to it.