This inefficient/useless MM/Specialist system needs to be replaced by an automatic system similar to the mining system in crypto-trading (Bitcoin etc.). Every trader can decide to make funds available for running the system, for which the trader gets a compensation; much like giving a short-term loan and by this earning money (ie. like fixed income). This new automatic system can replace all the useless MMs and specialists , and lead to tighter B/A spreads and much better liquidity. This idea came to my mind just yesterday, but currently I'm occupied by other important work. I would like to see this idea one day be realized by others out there.
supply and demand. everything else is an attempt to quantify/explain that supply/demand or to see if that supply/demand is mispricing the option.
thanks for the replies. i heard someone say if the stock price moves in their favor, the option price doesn't change by alot but if the stock price moves against them then the option price moves alot against them. why would someone trade options if that is the case? wouldn't just trading the underlying stock be better if they could do that instead that way they get 1:1 price movement in both directions. with options it seems like if the stock moves by $1 in your favor, your option price doesn't move by $1. it might only move 25 cents. or 50 cents i'm not sure. but why settle for 50 cents when you can get $1? i understand that options provide alot of leverage you can't get with stocks but i dont get why people settle for it only moving 50 cents for every dollar the stock moves. there must be some program that does all of that. working behind the scenes.
yeah that's what i suspected but options have a really strange price action not moving 1:1 with the stock price, i dont think individual traders would go along with only getting 50 cent on the dollar when the stock moves $1 and they only get price movement of half that. how is that a good deal for them? yet they are forced to accept that it seems like. forced by the market, which maybe is some computer pricing algorithm that sets prices.
Sounds like a pitch in the dirt, but what the hell. Stock movement impacts both the put and the call. Stock goes up $1 ATM call expected to go up $.50 - ATM puts should drop about $.50 and magically there is your dollar net. The first derivative of price is delta, but it is not static. Read up on pricing dynamics. Lots of free education you can start at OIC or CBOE websites or hit your local library. If you have a business college nearby, consider starting there. Tons of free stuff out there.
hmm ok! $1 net from both sides. but if the stock goes down $1 then the atm call goes down by more than $0.50? and the put still only goes up by $0.50? someone is getting screwed if that's the case it seems like.
here's another simple question? how can you know what a stock's delta is? do they publish that somewhere? in real time so you can see it changing? and how do they come up with that value? it would have to be an estimate somehow. someway. but i have no idea how they estimate it and if one company's estimate is the same as anothers. i guess the market just does what it does and people can try and measure it ...
its serious questions. thanks for your answers. i'm reading them all. but that black scholes equation is too complicated to bother with you would need a degree in mathematics to understand it.