When computing option prices one needs an "interest rate", which I usually take as zero, or rather the rate I would get for a savings account in US dollars. It used to be near-zero, right? But recently I saw I'm getting 3.5% for 1 year deposits at the local bank! Checking US deposit rates on the internet though is very inconsistent, I see both 0.01% (what I used to consider as "the rate") and rates as high as 5%. So which one is it? Also if 5%, and ignoring the inflation ... doesn't this invalidate quite a few trading systems? I mean getting 5-10% consistently with low risk and high Sharpe used to be pretty good (at least that's what a lot of people were saying they'd be happy to) but still, in finance there's always risk. So now it's just better to pull out of stocks and just deposit your money in the bank, safe and guaranteed win.
That’s why you see corporations and asset classes going belly up. Many of them can’t beat the Fed fund rate (4%) on a risk adjusted basis. Therefore investors buy bonds and sell their speculative investment with negative cash flow.
Fed rate is 3.75-4% and will raise next wednesday. You can take the yield on a treasury note with similar duration like the option you want to calculate. It was near 0 for a very long time, yes. On the 2nd question about trading systems. You are right to some extend, 5% net profit now on a risky asset like a trading system is not worth what it used to be. But those current rates are not projected to last very long at these levels, you can check out the yield curve (currently inverted). And depending on the system design it may has a lot of idle cash (or collateral in risk free assets) a lot of the time, so the returns on this will improve nominal results.
This is a good point not just for trading systems but for our entire capitalist system. Good or bad we’ve had a 0 interest system for quite some time and entire industries were built on that. Everyone chasing relatively low returns, and asset bubbles in everything from skyscrapers to basketball cards because “it’s better than having it in the bank.” A friend of mine is trying to raise a small fund (around 5 million) to do angel investing. He’s somewhat new, but is very well connected, smart and I didn’t think he’d have any trouble doing it, and last year he probably could have in 60-90 days. He is running into again and again “I’m just going to leave it in the bank for now” when talking to investors. We were very very drunk on low/zero rates for a long long long time. We’ve just begun to feel the effects of a higher interest hangover. I think all assets are going to experience considerable pain over the next 6-12 months and maybe longer.
Most brick & mortar banks have low rates for savings accounts but online only banks have decent rates. https://www.depositaccounts.com/savings/
OK guys, thanks for your answers. So it's for real, the rate has gone up to what used to be investment level of return (at least some of them).
%% Its both; less than 1%, up to 4% was what i saw WSJ+ BankRate .com, last week Some may think , big difference , 4or 5% + 10%. Stocks[SPY benchmark]+ business tend to do so much better than fixed rates or bonds in long run. Even more so if one is inclined for+ enjoys business. Someone telling me a 1-4% bank rate is better than a business idea, tells me its not the bank rate4% \ its the business idea, but good polite way of saying no thanks, on that business idea