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Eh, if I wanted bankrupt a trading account by playing a reliably bad strategy, I'd buy deep out-of-the-money options expiring this Friday. The expected value is
by jaredtn 6y ago
Eh, if I wanted bankrupt a trading account by playing a reliably bad strategy, I'd buy deep out-of-the-money options expiring this Friday. The expected value is $0 (neither positive nor negative), but they have only a miniscule probability of profitability.
- socketnaut 6y agoWhen you say "expected value" are you trying to say most likely value?
- jaredtn 6y agoNo, I mean the mathematical mean, not mode. If you take this action infinitely many times, what is your average (mean) return? https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value
- socketnaut 6y agoI see, so you're saying the expected profit on the trade is $0 assuming an efficient market and ignoring trading costs? Your comment is confusing the way it's worded because the expected value of the option is non-zero.
- jaredtn 6y agoAh, sorry for that. I meant E[return on option - cost of option] ~= 0.
- Bubbadoo 6y agoThe idea of buying deep OTM options is that they are 1. cheap 2. still have the possibility of turning green prior to expiry.