At its core, the mathematical model for "pricing" options is flawed, because it assumes that prices are normally distributed. Well, guess what, they are not. So we have a serious problem right from the start. In fact, I strongly suspect that the whole option model (including binary options) has been designed to favor the "house" (the option sellers and market makers), at the expenses of the retail traders.
You can simply look at the option chain of a specific instrument and its done for you(assuming you are a quant) You are throwing in extraneous variables which could be true,but has nothing to do with the OP's question..Hes looking at an exotic structure..If what you say is true regarding equal probabilities,you are implying that any skew can be arbitraged... OP is looking at a double knock out type stucture..We are talking path dependency.. Mercifully,I havent looked at an exotic in years,but I could ballpark probabilities with deltas..Not going to be pretty.but i wont get picked off,nor will anyone trade at my level he knows the probablity of touch for all the boundaries and now has to come up with a tree like structure and can apx it....Like I said,its not going to be pretty
maybe,but its all you got unless you have built a better mouse trap.. You are restating that option pricing theory is incorrect,or perhaps the skew is not correct... If you are correct,you should be able to profit immensely from that... Im guessing you are a big buyer of tails???
Let's forget about options for a second. The price of a stock is $100. I bet you $20 000 that it will drop to $90 before hitting $110. Would you take such a bet? What specific formula would you use to calculate your probability of winning this bet? See, very simple question.
how can a zero sum product favor one side when you can trade either side? second prices actually do move in log normal space for the most part.
?? You are out of your depth here and are ignorant about it. I am out of my depth but I know why. prob the only active poster I know who can answer it will be sle. He make markets in those products.
For the most part yes...except when they start printing fat tails. (Long-Term Capital Management and other "quants" learned this fact the hard way)
Will you stop these childish personal attacks each time you cannot answer an extremely simple question?