4 ms·

Of course they have uncertainty bars. They are called stock options.

perl4ever 8y ago
That's not what I mean. Options tell you something about what people expect to happen to prices in a given timeframe, but that's not the same as the uncertainty in the underlying value. For example, say I have an early stage biotech company that's losing money. The value is somewhere between zero (if they go out of business before becoming profitable) to a fairly large number if everything goes perfectly. Options have an expiration date, and probably the longest dated ones on a lot of stocks are under 2 years. That's a pretty short time period. I just looked at an example, and the at-the-money calls and puts were about 40% of the price of the stock with expiration around 1.5 years out. That's not at all where I would put an uncertainty range, because at any time the stock can suddenly reflect prospects beyond 1.5 years in the future.
- hendzen 8y ago
  Options are one of the best tools we have to price uncertainty in the value of publicly traded companies. The option prices allow you, using Black Scholes, to calculate an implied volatility that can be used quite similarly to the error bars on a measurement. The EMH would say that a company's stock price accurately reflects all current knowledge about a stock's underlying value. So from the point of view of an investor in publicly traded companies, a stock's price and its underlying value are the same thing. Options have an expiration date because as the further you go out the more uncertain things are, and the harder it becomes to make a market in options in a way that (a) won't result in a high chance of losses and (b) will have someone actually willing to buy them. That's why you don't see 10, 20 or 50 year options. That doesn't hurt their value for pricing uncertainty because as options expire, new ones are minted. Therefore, you can always use them to price the uncertainty of the price to the next quarter, the next 6 months or the next year.
  - scurvy 8y ago
    Black Scholes is a terrible model though. Just ask LTCM what they think of Bob and Myron's toy. Put another way, "don't get high on your own supply."
    - deleted 8y ago
      [deleted]

That's not what I mean. Options tell you something about what people expect to happen to prices in a given timeframe, but that's not the same as the uncertainty in the underlying value. For example, say I have an early stage biotech company that's losing money. The value is somewhere between zero (if they go out of business before becoming profitable) to a fairly large number if everything goes perfectly. Options have an expiration date, and probably the longest dated ones on a lot of stocks are under 2 years. That's a pretty short time period. I just looked at an example, and the at-the-money calls and puts were about 40% of the price of the stock with expiration around 1.5 years out. That's not at all where I would put an uncertainty range, because at any time the stock can suddenly reflect prospects beyond 1.5 years in the future.

hendzen 8y ago
Options are one of the best tools we have to price uncertainty in the value of publicly traded companies. The option prices allow you, using Black Scholes, to calculate an implied volatility that can be used quite similarly to the error bars on a measurement. The EMH would say that a company's stock price accurately reflects all current knowledge about a stock's underlying value. So from the point of view of an investor in publicly traded companies, a stock's price and its underlying value are the same thing. Options have an expiration date because as the further you go out the more uncertain things are, and the harder it becomes to make a market in options in a way that (a) won't result in a high chance of losses and (b) will have someone actually willing to buy them. That's why you don't see 10, 20 or 50 year options. That doesn't hurt their value for pricing uncertainty because as options expire, new ones are minted. Therefore, you can always use them to price the uncertainty of the price to the next quarter, the next 6 months or the next year.
- scurvy 8y ago
  Black Scholes is a terrible model though. Just ask LTCM what they think of Bob and Myron's toy. Put another way, "don't get high on your own supply."
  - deleted 8y ago
    [deleted]