DMO is exactly right... Ideally, all option pricing models are based on arbitrage pricing (replication, etc). Arbitrage pricing has flaws, as lots of assumptions need to hold for things to work. What dmo is saying is that ultimately everything is about equilibrium pricing and IV is a measure of the supply/demand equilibrium. Trouble is that it's really difficult, if not impossible, to implement good equilibrium pricing models, so we just settle for things that are imperfect, but tractable. Maybe the issue is that there hasn't been enough effort applied in the right area...
1. Unsure whether DMO and you are talking about exactly the same explanation. Are you sure DMO talking about "IV IS just demand" is the same thing as your "everything is about equilibrium pricing"? As if IV is no different to evrything, the why do we need to use IV for options? Anyway I personally just don't feel either of you wouuld provide a good understanding of IV in relation to options. 2. Specifically, what is the IV measure in relation to (what?) other measures/ factors, and can you provide detail for supply/demand of what? An example would be appreciated. Thanks! 3. Below are some relevant comments. http://www.elitetrader.com/vb/showthread.php?postid=2528889#post2528889
i think we all agree on the fact that vol is a function also of spot relative to strike, so yes there is a relationship and I never contended that. My point was that it does not pay (relative speaking) to establish a pure directional view through an option position unless you are absolutely right on a number of variables which, I argued earlier, the average retail guy is over time incapable of correctly predicting. The same applies to rates options as well (caps/floor/swaptions, I have traded them professionally myself)
Asia- you have no idea how far underwater you are in this exchange with Martin and Atticus. Martin- how is everything going with you mate?
ESL is warranted here. You ran from the Buffett thread with your tail between your legs. Here is your M.O.: Make unsupported BS claim Get busted Make unsupported BS claim conditional using "relative" and "retail" Get busted again Go off topic in lieu of offering support to BS claim Get busted again Mention fantasy exotics desk Get busted again
so those are the options experts on ET, lol. Full of air nothing else. Everyone who reads up on that thread knows precisely whats going on. You were taken apart like a dog. All the control to the pretentious, just like in real life. So what value do you have to add to the OP's question, options god? I am slowly getting the impression you are exactly one of those who fell pray to the broker bla about vertical spreads, ratios, and credit plays, lol.
Buffett's own MTM loss = his GAAP loss reverse pool; which proves there was/is no hedge. You and Buffett lose. You eat dog? Perhaps any bull/bear index risk-reversal into an index rally/decline, matched for initial delta. I don't see how retail is constrained from trading the risk-reversal.
lol thats not a pure directional play, you lose again!!! If you knew anything about the huge Eurostoxx option play that went through Deutsche last year you would know what I am talking about. I am outa here, this is bordering to a complete waste of time. OP, ask atticus he kows it all (so he thinks).