3 ms·
Suppose you are right. If the near-the-money options are correctly modeled, how will you make money on them?
by lordnacho 3y ago
Suppose you are right. If the near-the-money options are correctly modeled, how will you make money on them?
- SkyMarshal 3y agoI don’t know, no one asked that followup question, everyone just accepted it. There’s probably more to it he didn’t elaborate on. I assume it depends partly on asymmetry of information between a more sophisticated option seller (like Universa) and buyers (especially retail). Maybe also the ability of the seller to sell a diverse heterogenous mix of options and construct the mix to achieve a small positive net revenue. Options sellers tend to blow up eventually when they sell way out-of-the-money options, and this strat avoids that at least.
- Majromax 3y ago> If the near-the-money options are correctly modeled, how will you make money on them? In a hand-wavy sense, they're the hedge. A mis-priced option isn't completely mis-priced: some of the modeling is correct enough. The trick to making money is to buy the mis-priced option, but then sell back the "part" of it that is correctly priced. That leaves you holding only the part where you think you have an edge, and in turns this is what makes the "insurance" model somewhat viable.