Lookbacks, and strips and touches and all that are well fascinating... Goog and PCLN and all that are great...but we are talking here about tiered binaries and well specifically as they relate to nadex types of binaries. Weve covered bid ask spread, fees, variable payouts on verticals versus fixed payout on binaries, and a slew of other topics. Sure we can go off topic and all. I will probably just say uh huh uh huh as well I don't have access to these as a US Citizen as it has no practical application as I can't execute the trade. Feel free to post away but practical things on topic would be more useful for us limited USA binary traders. Though I am sure so long as it is practical and useful and will help people make money those outside the US will no doubt find it fascinating and ideally useful, do teach!
Thank you for the short sentences for us simple folk Appreciate your contribution. Though I do not see how this has contradicted what I have said already or agreed to.. 1 European digital can be priced and risk managed as an arbitrarily tight call spread (or put spread, same thing). Cool don't need to disagree on this... 2 Nadex or any other provider will use this replication for pricing/risk-managing and pass the cost on to you via bid/offer. You mean the market maker yes of course they will hedge. Whether through a book or laying off the trade or as I have discovered through verticals...As stated this is a cool fascinating topic of hedging. Though maybe you can help me understand how they would do this on a 2 hour and daily contract when there are no call spreads with the same expiration to do so. Not arguing at all just trying to get how they would do it. And as you said - any other exchange CME CBOE etc... has bid/offer for market makers whether doing verticals or whatever 3 This replication is model independent, does not matter if you use Black-Scholes or Normal model or any option model No reason to disagree here sounds like more than one model can be used cool 4 Spread replication captures the skew of the implied distribution. Black-Scholes analytical digital price does not, the difference is pretty large. I'm not comparing Black Scholes analytical digital price... Im just looking at the obvious and yet to be disproven reality that a call's delta "not price" on a call strike on CME ES options with the same strike and expiration as a strike and binary on Nadex .who know maybe they are using a different model..either way the facts are the facts the delta of the call and the price of the binary are same over and over again day and night. I have shown multiple screenshots and have yet to see anything proving this is not accurate. As well it can't be as they line up over and over and over again. 5 Delta is not the same as digital probability, N(d2) is - using delta is an OK approximation, but it's not ok for risk management purposes I said it was not perfect that it was approximate not exact and was okay with this. I would not rely on this as a means for risk management and did not state such. So sounds like we are in agreement. 6 Replication, unlike an analytical model, produces manageable delta (non-Dirak delta) So long as their are verticals with lining up expiration to do this with? or regardless of difference in time to expiration? 7 Replicating nature of the digital means that you don't need a dedicated "binary" exchage and no real value is added by such an exchange aside from additional fee and bid/ask spread generation An exchange provides the service of transparency of not having the counter party know your position and who is posting what order. Also regulatory oversight that ideally protects the consumer is a benefit, though we all will admit does not always work Bringing buyers and sellers together.. The same could be said of any option i guess... binary vanilla exotics futures or otherwise though I'm sure some points could definitely be made strong for certain ones over others From what i have seen from most OTC binaries and their low payouts like 70% etc.. Risk $100 to make $70 they are making a $30 bid ask spread which is much larger than Nadex bid/ask spreads and fees. Of course they do have other exotic options with variable payouts but trying to stay on topic regarding a binary options that is open or close before expiration. I can't do intraday and daily verticals but I can on binaries and since you say they are the same this does benefit me. Also even if i could do verticals I, unless maybe using them for hedging, I would not as the variable payout structure if the underlying expires in between the strikes versus simply above the binary strike for full payout (as exhibited previously. Others may want to cool kudos have fun.... 8 one sided American binary is not identical in price to 2x of the European binary because of the vega convexity and vega-spot cross effect. There is no perfect replication portfolio Okay sure no problem 9 there is a pretty good chance that you are a Nadex rep Well all I can say is I'm not... but what would you expect... I mean come to think of it you know those super high paid reps work around the clock posting at 11:30 and 1 am etc.. multiple nights a week... and are all about a forum thread. Really? And well i guess it only make since that if someone has posted valid points and are willing to debate a topic and they like nadex binaries of all things they must be a rep...Really? The question reminds me of a story my philosphy professor told us once regarding a story about Aristotle or Plato..whoever it was...anwyay. Someone trying to trip him up had a bird in their hands... they asked him ... Is the bird in my hand alive or dead... if he said alive they could kill it... and prove him wrong... if he said dead they would open their hands proving him wrong... his reply was "the answer is in your hand" So cool looks like we are mostly in agreement sle no need to disprove you
I had to take you off ignore to see if you'd respond to sle and of course you redact virtually all of your statements. sle: 1 European digital can be priced and risk managed as an arbitrarily tight call spread (or put spread, same thing). sle: 2 Nadex or any other provider will use this replication for pricing/risk-managing and pass the cost on to you via bid/offer. jackie: You mean the market maker yes of course they will hedge. Whether through a book or laying off the trade or as I have discovered through verticals...As stated this is a cool fascinating topic of hedging. Though maybe you can help me understand how they would do this on a 2 hour and daily contract when there are no call spreads with the same expiration to do so. Not arguing at all just trying to get how they would do it. And as you said - any other exchange CME CBOE etc... has bid/offer for market makers whether doing verticals or whatever sle: 3 This replication is model independent, does not matter if you use Black-Scholes or Normal model or any option model jackie: No reason to disagree here sounds like more than one model can be used cool sle: 4 Spread replication captures the skew of the implied distribution. Black-Scholes analytical digital price does not, the difference is pretty large. jackie: I'm not comparing Black Scholes analytical digital price... Im just looking at the obvious and yet to be disproven reality that a call's delta "not price" on a call strike on CME ES options with the same strike and expiration as a strike and binary on Nadex .who know maybe they are using a different model..either way the facts are the facts the delta of the call and the price of the binary are same over and over again day and night. I have shown multiple screenshots and have yet to see anything proving this is not accurate. As well it can't be as they line up over and over and over again. sle: 5 Delta is not the same as digital probability, N(d2) is - using delta is an OK approximation, but it's not ok for risk management purposes jackie: I said it was not perfect that it was approximate not exact and was okay with this. I would not rely on this as a means for risk management and did not state such. So sounds like we are in agreement. sle: 6 Replication, unlike an analytical model, produces manageable delta (non-Dirak delta) jackie: So long as their are verticals with lining up expiration to do this with? or regardless of difference in time to expiration? sle: 7 Replicating nature of the digital means that you don't need a dedicated "binary" exchage and no real value is added by such an exchange aside from additional fee and bid/ask spread generation jackie: An exchange provides the service of transparency of not having the counter party know your position and who is posting what order. Also regulatory oversight that ideally protects the consumer is a benefit, though we all will admit does not always work Bringing buyers and sellers together.. The same could be said of any option i guess... binary vanilla exotics futures or otherwise though I'm sure some points could definitely be made strong for certain ones over others From what i have seen from most OTC binaries and their low payouts like 70% etc.. Risk $100 to make $70 they are making a $30 bid ask spread which is much larger than Nadex bid/ask spreads and fees. Of course they do have other exotic options with variable payouts but trying to stay on topic regarding a binary options that is open or close before expiration. I can't do intraday and daily verticals but I can on binaries and since you say they are the same this does benefit me. Also even if i could do verticals I, unless maybe using them for hedging, I would not as the variable payout structure if the underlying expires in between the strikes versus simply above the binary strike for full payout (as exhibited previously. Others may want to cool kudos have fun.... sle: 8 one sided American binary is not identical in price to 2x of the European binary because of the vega convexity and vega-spot cross effect. There is no perfect replication portfolio jackie: Okay sure no problem sle: 9 there is a pretty good chance that you are a Nadex rep jackie: Well all I can say is I'm not... but what would you expect... I mean come to think of it you know those super high paid reps work around the clock posting at 11:30 and 1 am etc.. multiple nights a week... and are all about a forum thread. Really? And well i guess it only make since that if someone has posted valid points and are willing to debate a topic and they like nadex binaries of all things they must be a rep...Really? The question reminds me of a story my philosphy professor told us once regarding a story about Aristotle or Plato..whoever it was...anwyay. Someone trying to trip him up had a bird in their hands... they asked him ... Is the bird in my hand alive or dead... if he said alive they could kill it... and prove him wrong... if he said dead they would open their hands proving him wrong... his reply was "the answer is in your hand" jackie: So cool looks like we are mostly in agreement sle no need to disprove you
An ATM call (zero carry and divs) has a delta of 50. Go ahead and check every optionable ticker in the SP500 and you'll arrive at the same delta.... 50 per contract. Yeah, you'll get some stuff that will skew it a bp or two due to going ex-div during the contract duration, but rates are at zero How about a digital on Coffee (let's assume a daily option) which also has a value (ATM) of 50/100. So does an ATM digi on XOM, ZB, GC, CL, etc. The ATM daily vanilla call on Coffee also has a delta of... 50. Same goes for XOM, ZB, GC, and CL. They must ALL be related, right ese?
guess your memory is fuzzy - put me on ignore list - then post reply to me - then ask SLE to reply then sle replies - oh an inbetween it all sent me an insulting PM . so I guess I'm not on ignore now... Not sure what statements I redacted I agreed with him on many things. I've had no problem with SLE's post. If anything maybe it clarified misunderstandings you had about what I was posting? Or maybe I guess your seeing what you want to as a replacement for providing no counter evidence to any of my statements simply throwing insults and empty rhetoric. Thats okay Maybe youve made up your mind and you don't want to be bothered with the facts.. Either way Good way to try to redirect can't blame you for trying. I admitted before and then that the hedging idea with verticals is a cool concept I even gave you kudos previously maybe you put me on ignore before you saw that part. I stated multiple times that I could see there being obviously more than one pricing formula but have yet to see any evidence that binaries are poorly priced verticals... and said before his post several times that verticals could potentially be used but where not exact as of expiration and don't have the intraday and daily expirations so I don't like them for that reason as well. Binaries can be priced using calls delta (when strikes and expirations line up Verticals have variable payouts within the strikes binaries do not it is over or it is under and this makes binaries have a higher payout on a larger price range (comparing a nadex binary to the vertical example provided). Im sure on other types binaries you could find other cases. Bid ask spreads are manageable and acceptable especially in light of the vertical variable payout comparison. Fees are fine less than verticals Comparing the verticals to the binaries at expiration if in between the verticals strikes versus above ona buy or at or below on a sell the binaries made money every time The pricing model is sound works well for me for multiple strategies A summary list from the full analysis I did is as follows and I did not redact any of the statements made: * The fees are substantially lower on Nadex binaries in comparison to the vertical. * The bid ask spreads are in fact higher on the binary in comparison to the vertical. * In both cases you don't pay the bid ask spread if held to expiration. So in comparing to holding to expiration the bid/ask spread is void. * The fees will be lowered on the verticals if exercised versus closing before expiration. * Exercise risk exist on the verticals but not on the binaries. * Despite the higher spreads combined with the lower fees the binaries versus verticals, binaries easily surpasses that of the vertical spreads in profit in all price movement ranges due to a binaries all (in the money by 1/10th of 1 tick) or nothing payout (OTM) versus a variable payout at best on a vertical and a nothing payout if it expires OTM * Bottom line in all cases more can be made using the binaries than that of the debit spread on a buy to expiration comparison hmm yup looks like nothing was redacted that was not already said before the post...again good attempt at redirection [/QUOTE]
No, I didn't reply to you. I posted the Nelken "discrete vertical" parse to the thread. Please show me where I quoted you. Yes, I saw sle's (later) challenge and took you off ignore to read your comical response. it was worth it, as you did not disappoint. You stated that verts and digitals are "completely different instruments" and then responded that you now accept equivalence. You stated that binaries are a "delta derivative" and went on to disavow that statement when called-out by sle. Then you make some magical connection between the ATM pricing of a digital to the delta of an ATM call or put. Astounding. What's even more astounding is that all calls and puts on all tickers share that condition.
Wow you just seem to talk and not listen maybe its that ignore button that has you so confused. Maybe you just hate to admit your wrong. Maybe you missed like the 5x I replied to your misunderstanding of the statement of not just ATM, but also ITM and OTM deltas lining up with binary pricing. Again man show me a single case here it does not line up. Here is my proof wheres yours? (deja vu anyone?) Are coffee and soybeans and gold and ES all related as their deltas are 50.... no I never said that - the formula is related - in the sense that all the ATM's on them have a delta of 50 - but the instruments themselves never made that connection - are you making stuff up now to try to prove .. well i don't know what your trying to prove as you have not proven my claim to be false ... so here you go again - i said on the underlying instrument - ie ES for US 500 - on ES options with same strike same expiration the deltas are the exact same as the US 500 binaries with the same strike and expiration - mabye you need to read this 10x or something so you stop assuming something besides what is being said... Show me how i am wrong here you go live market ES options deltas and US 500 binaries - In the money, out of the money, and yes at the money Love how you edited out that "back on ignore" and then replied just now... Im glad I did not disappoint you.
I can't really contribute on the same level of knowledge that sle and drownpruf has on this subject.. ..but I do see an flaw in your 'delta == price' argument, jackieo79. All your visual examples appear to be comparing the delta of a given strike to the 'BID' price of the digital, not the midpoint. Coincidence or not, if you're saying the delta is the 'fair' price, then the MM's pricing that market should be making their spread padded around the supposed 'fair' price... not bidding directly at the price you pointed out and offering it 4 units higher. That would suggest an asymmetrical pricing error. So with that, you should seriously consider what drownpruf and sle are saying.
jackieo79, The delta = digital price is an approximation that nobody disputes, but you cannot ascribe the model delta to a digital probability, period. You stated it was inviolate only to change you tune. You stated that the vertical and the digital are "completely different instruments" which is incorrect. You want to brush it off, but 70% of this thread is you disputing vertical = digital. The granularity of strikes in vanillas makes empirical proof difficult to generate. It would require a strip of narrow strikes to reproduce in lieu of a discrete, sub-dollar vertical that is not available in listed-volatility. It can be easily replicated with an OTC price -- something akin to say... a dime-wide vertical on a $30 underlying using any pricing model you like.