How Do Options Make Predictions?

This is a Prop-Trading part of our business.

http://www.marketguidance.com/index.html

It is a separate operation from our Money Management division. The "multi-monitor" setups are used for all of our 3 divisions. We currently have operations in 4 different cities. The trading floors are different for all of them. I just want to make something very clear:

WE DO NOT SELL, LICENSE OR DISTRIBUTE ANY OF OUR SOFTWARE. WE ONLY USE IT FOR OUR INTERNAL TRADING WITH OUR OWN FUNDS. WE HAVE LIMITED EMPLOYMENT OPPORTUNITIES AND DO NOT ACCEPT ANY SOLICITATIONS FOR OUR SOFTWARE. WE DEAL ONLY WITH INSTITUTIONS AND OTHER HEDGE FUNDS IN TERMS OF USING OUR PRODUCTS FOR SHORT, MEDIUM AND LONG TERM TRADING

 

Lots of something on this thread, but not an answer to a simple question.

Sad.

I know jack shit about options compared to some, but this is not hard question.

Let's see if these guys with 150 monitors can actually give a straight answer.

 

OK, OK, here's the answer:

Look at the price of the ATM front month straddle (assuming the move is expected before the front month expiration), which is the approximate size of the move that the market expects.

 

if you think the answer is simple it only proves you know jack shit about options ...

 

Well, this is not incorrect, but it is incomplete.

The theta of the straddle can also be covered if the realized volatility is such that the underlying moves back and forth enough to cover theta. So if a stock is $5 say, and the ATM straddle is $1, that does not mean the market expects the stock to be $4 or $6 within the given time to expiration of the straddle. However, that would be one way that the the straddle theta would break even.

 

The answer is "YES". The "how" question however is up to you to answer.

 

Watch this:

http://www.ted.com:80/index.php/talks/steven_strogatz_on_sync.html

 

swarn theory..dumb individually smart in colonies....

 

One of the best responses so far in this thread.

"Ask not what your straddle can do for you, but what you can do with your straddle."

Author, unknown

 

mte's answer is close enough. The added genius is debatable.


I don't get where you think the vibration (path) of the stock could be embedded in the vol.

You mean to tell me they have an opinion that XYZ will vibrate 10 times between X & Y before landing at some price? This is highly unlikely .

Of course if the stock goes 5 -4- 5- 6- 5- 4- 5- 6- 4- 5- 6- 5, you can make a killing on a straddle.

I can make a killing on the lottery if I know the numbers too.

Essentially , the atm straddle tells you what the market thinks the breakeven move will be , so that neither buyers or sellers have an apparent 'edge'. If you think they are mistaken then you can play happily. If not, you can't. They get it wrong often enough.