5 ms·

'It also feels pretty far from the theoretical purpose of options trading. Options are meant to provide insurance (a “hedge”) against potential losses in a stoc

by runeks 12y ago

'It also feels pretty far from the theoretical purpose of options trading. Options are meant to provide insurance (a “hedge”) against potential losses in a stock position. Market makers like my friend create the environment in which to buy the insurance. This bot instead treats that market like a roulette wheel—except it knows exactly where the ball will land. “If someone else has what we call the ‘future script,’ ” says my friend, referring to the crystal ball of the algorithm bot, “it really feels like they’re just robbing you."' Robbing who? This is about as far from robbing as I can think of. 1. Someone offers to sell a bunch of options, because he thinks he'll make more money from this than if he didn't sell those options. 2. Someone buys these options because he think he'll make more money than if the didn't buy them. 3. Time reveals the guy who bought the options was right, and he makes money. This is simple speculation, and has nothing to do with robbing.

yaleman 12y ago
It's only "robbing" when you're losing money instead of making money - which a lot of these crazy made up systems (options, etc) can't help but do most of the time. They're just complaining about evolution :)
encoderer 12y ago
Anybody that thinks the primary purpose of the options market is "insurance" is ignoring their history. Among other things, calls were introduced 4 years before puts. They are derivatives. They serve many purposes.
- amelius 12y ago
  What purposes exactly? If you'd ask me those derivative products are a convenient alternative to casino style gambling and mostly add instability to the market. I would love to hear an informed opinion, though. What do these products solve, why are they essential? Also, what would happen if we would tax them more heavily, perhaps incrementally over a period of time?
  - pjlegato 12y ago
    Options and many other derivatives are not merely a casino game. Their unique role as financial instruments is to allow the transfer of risk from those who have risk and don't want it (hedgers) to those who don't have any risk and do want it (speculators). This is different from gambling because gambling by definition involves the creation of entirely new risk for the purpose of wagering; derivatives transfer pre-existing risk that will continue to exist anyway even if the derivative didn't exist. This is identical to the more familiar role of an insurance company in everyday life. For example, suppose someone has a long term stock portfolio -- a classic fundamentals investor with a decades-long time horizon, the farthest thing from a casino style gambler you can find in the stock market. Maybe it's a pension fund or an institutional endowment. They very much do not want to take highly risky short term bets. They are only interested in safe, slow, long term returns. But markets can only provide that in aggregate. In the short term, markets are very unstable, and individual stocks go to 0 if the company folds. The long-term investor thus constructs a portfolio of many small investments rather than a few big ones. The portfolio manager has reason to believe that XYZ, one of the portfolio companies, is about to go bankrupt. This is not certain, but the stock has already begun to drop. If the stock drops to 0, the portfolio stands to lose a lot of money (despite continuing to exist overall because of diversification.) The portfolio manager can buy put options to hedge XYZ. These give the holder the right to sell XYZ stock at a certain price, regardless of its current market price. In this case, they function as a form of insurance. If the rumors are false, XYZ stock will bounce back up and the put expires worthless. If the rumors are true, XYZ drops to 0, but the portfolio manager can still sell his XYZ stock to the speculator who sold him the put option at a pre-determined price. This is no different from buying fire or flood insurance on your house -- if the value of your house goes to 0 through disaster, you can in essence sell that worthless house to the insurance company for a predetermined price and buy another house. Options are the stock market version of that. If you tax them more heavily, that will make them more expensive to use, which will discourage people from using them and arguably increase instability while decreasing growth in the stock market as everyone will be forced to carry the full value of any losses themselves, with less possibility for insurance.
    - amelius 12y ago
darkxanthos 12y ago
I can see why it could be viewed as robbing. The person selling options assumes there is no information asymmetry. The bots that do this aren't betting, they have new information that shows that the current options price doesn't reflect yet. I wouldn't say this is necessarily a bad thing myself just pointing out this is definitely not the spirit of what options are for.
- consz 12y ago
  But the information is public -- anyone can read the tweet as soon as it comes out, a computer just happens to do it a lot faster and better than a human.
  - giarc 12y ago
    Exactly and since bots are allowed to buy options, the seller shouldn't assume that only humans would be buying their options.
    - mlvljr 12y ago
      You are not allowed to count cards in Vegas!
  - darkxanthos 12y ago
    That's why I'm not saying it's "wrong" but it also is no longer making a bet on randomness.

by runeks 12y ago

yaleman 12y ago

It's only "robbing" when you're losing money instead of making money - which a lot of these crazy made up systems (options, etc) can't help but do most of the time. They're just complaining about evolution :)

encoderer 12y ago

Anybody that thinks the primary purpose of the options market is "insurance" is ignoring their history. Among other things, calls were introduced 4 years before puts. They are derivatives. They serve many purposes.

amelius 12y ago
What purposes exactly? If you'd ask me those derivative products are a convenient alternative to casino style gambling and mostly add instability to the market. I would love to hear an informed opinion, though. What do these products solve, why are they essential? Also, what would happen if we would tax them more heavily, perhaps incrementally over a period of time?
- pjlegato 12y ago
  Options and many other derivatives are not merely a casino game. Their unique role as financial instruments is to allow the transfer of risk from those who have risk and don't want it (hedgers) to those who don't have any risk and do want it (speculators). This is different from gambling because gambling by definition involves the creation of entirely new risk for the purpose of wagering; derivatives transfer pre-existing risk that will continue to exist anyway even if the derivative didn't exist. This is identical to the more familiar role of an insurance company in everyday life. For example, suppose someone has a long term stock portfolio -- a classic fundamentals investor with a decades-long time horizon, the farthest thing from a casino style gambler you can find in the stock market. Maybe it's a pension fund or an institutional endowment. They very much do not want to take highly risky short term bets. They are only interested in safe, slow, long term returns. But markets can only provide that in aggregate. In the short term, markets are very unstable, and individual stocks go to 0 if the company folds. The long-term investor thus constructs a portfolio of many small investments rather than a few big ones. The portfolio manager has reason to believe that XYZ, one of the portfolio companies, is about to go bankrupt. This is not certain, but the stock has already begun to drop. If the stock drops to 0, the portfolio stands to lose a lot of money (despite continuing to exist overall because of diversification.) The portfolio manager can buy put options to hedge XYZ. These give the holder the right to sell XYZ stock at a certain price, regardless of its current market price. In this case, they function as a form of insurance. If the rumors are false, XYZ stock will bounce back up and the put expires worthless. If the rumors are true, XYZ drops to 0, but the portfolio manager can still sell his XYZ stock to the speculator who sold him the put option at a pre-determined price. This is no different from buying fire or flood insurance on your house -- if the value of your house goes to 0 through disaster, you can in essence sell that worthless house to the insurance company for a predetermined price and buy another house. Options are the stock market version of that. If you tax them more heavily, that will make them more expensive to use, which will discourage people from using them and arguably increase instability while decreasing growth in the stock market as everyone will be forced to carry the full value of any losses themselves, with less possibility for insurance.
  - amelius 12y ago

darkxanthos 12y ago

I can see why it could be viewed as robbing. The person selling options assumes there is no information asymmetry. The bots that do this aren't betting, they have new information that shows that the current options price doesn't reflect yet. I wouldn't say this is necessarily a bad thing myself just pointing out this is definitely not the spirit of what options are for.

consz 12y ago
But the information is public -- anyone can read the tweet as soon as it comes out, a computer just happens to do it a lot faster and better than a human.
- giarc 12y ago
  Exactly and since bots are allowed to buy options, the seller shouldn't assume that only humans would be buying their options.
  - mlvljr 12y ago
    You are not allowed to count cards in Vegas!
- darkxanthos 12y ago
  That's why I'm not saying it's "wrong" but it also is no longer making a bet on randomness.