I am advising him to learn from them the logic behind risk taking. Their system involves finding your probability of winning and expected payoff. You don’t need to win most of the time to be profitable. You can lose 95% of bets and be ahead. Those guys teach you to understand this. Most people don’t get it. Peace, Amahrix
study option pricing and then look for opportunity, I don't think anything else matters. Jeff Augen from NYIF offers comprehensive material from which I studied from for years.
and then when you try and capitalize on the "professionals" stupid flaw in pricing - good luck getting the flawed price you see on the quote. it will be updated to the correct price and the flaw that "paper traders" theorize about will be sold as hope to the unwitting.
If one got a good method/model for directional trading, one can take advantage of the very good risk vs reward of buying options instead of buying index futures or index ETF's. Buying options if part of almost every multi-leg options strategy. Also for portfolio hedging. It's not black or white.
...because no market making operation ever lost any institution anywhere money. Ever. I got a bridge to sell ya!
Peace Mark, Kindly; I believe you're missing the point. If you look at HOW options are priced via the models used by option dealers today(Black-Scholes/ARCH/GARCH/other techniques), you'll come to realize they have major flaws in them. Today, option dealers efficiently price their options in accordance with their models, so there will not be any option price inefficiency in the market place if you take this view. BUT, the inefficiency is in the fact that the entire model doesn't properly take into account tail risk, and can be argued that it underprices large deviations(which do occur; rarely). They tried to take better account of tail option pricing with the volatility smile and other methods which came about after the 1987 Black Monday crash; this is when volatility was assumed to be constant. Options are priced using Gaussian, when Power Law distribution makes more sense. Point being, there can be found cheap tail option buys in the marketplace today, but the option dealer believes it's not cheap and that it is properly priced using his models. Model error occurs more frequently than you might think. They make money majority of the time. This is why they feel as tho they are winning, when in reality, they'll soon lose. So they don't care to change. How do you think people make 50x return, 100x return on options? Those dealers are getting killed, especially if they're dynamically hedging the option they sold. All the money they make during normal day-to-day action are all gone in 1 event, while the buyer rejoices in his awareness that model error occurs more frequently than not and big money can be made when the unexpected occurs. Peace, Amahrix
you meant to say those easily-getting-killed-dealers only made money from selling long tails? what a poor dealers.. what major flaw? enlighten me please.. today as in 2018, not prior 1987, right? peace :]
I don't think you understand what exactly a market-maker does in the modern market. In any case, "pricing the infrequent events" is so difficult because these events are so infrequent. I've yet to hear anyone being able to do it consistently and not bleed to death (as it is the case with NT and pretty much every tail hedger out there). The usual trajectory is as follows. After a dude buys a lottery ticket which pays off for him, he crows loudly and raises a lot of capital. Then he proceeds to do the same trades, bleeds out and closes his fund because he wants to write a book, spend time with is cat etc.
Yeah, models are models... got it. The utility is in relative-value. What we need are more noobs pontificating on the cautionary tale that are BSM, GARCH, ARIMA, VaR...