Thank you for the kind words. Trading is hard work because at the end of the day I am trying to take money away from my counter parties and they are not dummies willing hand over their hard earn money. So, I am constantly trying to learn something new to get ahead of the crowd. I did take your recommendation last time and signed up for some MOOC classes, took a couple of classes in economic 101 from University of California Irvine, an options pricing class from U Penn and a game theory class (trying to game my counter party ) from Stanford. I need to take some classes in modern portfolio theory when I have time because my trading method, stripping down to its very basic, is risk (Beta) based, so in a down market I will get killed. Speaking of option pricing theory, it is counterintuitive to me that option price does not include the underlying's mean, only its standard deviation? I know it is derived from the no arbitrage pricing theory but still very intriguing. Do you have any thoughts on that too? It is folks like you that keep me here. Thank you. Best regards,
===Any studies on who normally wins - option writer versus purchaser?=== reminds me an old anecdote: two women sit on the park bench, each with the ice cream cone in her hand the question: which one is married - the one who is licking her ice cream or the one who is suckling it? the answer: the one with the wedding ring on her finger the answer to your question - the one with the working method
I might just stick to liquid options. Today's PUT took awhile to break. Tried to get 1.30, ended up having to hit the bid.
My gut feeling is that buying calls on equity indexes have positive expected value and buying puts have negative expected value. With 0 ev defined as breaking even on the trade.
I have very little knowledge about options, however: For the discussion which side is better (buying or selling options/insurance) it is a bit irrelevant whether there are re-insurers or not. And you're incorrect in saying later that re-insurers don't hold the bag. They might be, that's the whole point or reinsurance. You are correct though, that selling options is like insurance business and insurance companies are there to make (handsome) profit. What people fail to understand though is that insurance business operates on certain principles, some of them being: having a big and statistically uncorrelated pool of insured (so things that happen to some are unlikely to happen to majority of others) and also carefully calculated (and therefore priced) risk of each event. On top of that, because unpredictable things can happen from time to time, there are laws that require proper reserve levels to cover disaster/unexpected claims and in case these are not enough, then there is re-insurance that you mentioned earlier to help with solvency issues in case of black swan events. The bottom line is this: if all you do is write options for one or only a few instruments then you are doomed. Selling options could make sense as long as the operation adheres to above simple principles. Option underwriter would have to have operation in many different instruments, write puts and sells all across the board. And even then, from time to time you hear about big blow ups. It's funny (or sad) that option underwriting doesn't require putting up reserves like regular insurance does. my $0.02 worth
That's why insurance companies are required to put up mandatory reserves for unexpectedly huge claims and there is also reinsurance business to spread the risk across. Spreading the risk across is entire point of the insurance business in the first place. That's why it is important to do business with the insurance companies that have a wide presence in many geographically uncorrelated areas and offering many insurance products and backed by sound reinsurers.
What hedging are you talking about? Reinsurance is an insurance on insurance. The risk is spread (not hedged) across further for a fee, that's why it is essentially insurance on insurance. The only way to hedge would be to pass that risk on completely (insurance on reinsurance) but even then it doesn't matter how many times you pass it on, the risk won't disappear. In insurance, spreading the risk is not hedging. You can only spread the risk to soften the blow by collecting premiums from other uncorrelated policies. To hedge you would need an instrument that pays out (appreciates) when you have claims coming in. For the last in line reinsurer, what would that be?