Why would so many people invest in stocks if they don't have positive expectation? They're dumb?

IT'S A PONZI SCHEME, DUH.

(I'll try to split all this nonsense out into another thread later if I get some time. Definitely doesn't belong in this one.)

It has already been explained to you in like 7 different ways. It's time for you to step out of this thread.

I'll take full responsibility. Sorry.

Still didn't figure it out huh? The cost is the premium of option which is non zero.

Yield. Yield and EV are separate concepts that donks like stupidpete don't get.

Keep dodging.

How are they separate? The "EV" of stocks is dividend yield + price appreciation.

Now we're starting to get to the root of the problem. Obviously any reasonable person would consider the dividend yield part of the expected return of a stock. You can't just argue for days ignoring dividends completely without specifying that you're leaving out a part of reality to make some theoretical point in a fictional world.

I take it back, technically, you can use the two terms interchangeably, as long as by "EV" you mean expected return.

there is risk premium

buy straddles or strangles in s&p vs selling them. the results are not the same over time. in fact the difference is very large. the sellers take more risk and are paid a premium. volatility is generally overstated

theres more to this than just direction. the price of options change. i haven't read all your posts but it looks like you might have missed a key principle in buying vs selling options which is demonstrated through buying vs selling straddles

grimm, you referenced modern portfolio theory earlier. If you're familiar with MPT why would you think an option that's heavily correlated with the market and the efficient frontier doesn't price in a risk premium?

maybe stop authoritatively throwing around words you don't understand in a noob thread if you don't want to look like a clown

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Yep, agree now, was thinking aloud with my zero sum comment. Obviously options could be priced so that both sides have 0EV, but makes sense that fair price is that the side taking risk has +EV and other side is -EV.

The option pricing will take into account the fact that dividends paid affect stock price though?

Haha, clearly not your fault, at least not entirely.

Plus, I like it when pete posts, so no apology needed.

Return on capital in every single industry. This is more a law of economics than any law of economics that was ever a law of economics.

Why is it +ev? I thought that the total return could be higher, but risk adjusted return would be the same with more volatility?

So that when you make a big fat profit, those EMH people can justify it by saying 'well you probably took a **** load of risk and just got lucky'.

Or is the implication of more volatility scaring people away so the risk adjusted return is higher according to EMH?

For the same reason as you pay up for automobile insurance instead of self-insuring.

But then you could just diversify over a lot of risky stocks and derisk your portfolio that way. And get a higher return without taking more risk. Isn't that against the spirit of EMH?

Options are fun

Not every risk is compensated. EMH doesn't imply that the market will pay you to leave your wallet lying around in public or to leave your keys in your ignition. It also won't compensate you for failing to diversify.

It does pay you to take on market/systemic/non-diversifiable risk.

I don't get it, if a security has a higher potential risk, but an even higher return, the risk adjusted return is higher as you said.

So that means I could probably find more of those, and properly diversify. Yet EMH always say that that is impossible.

Are you saying there are too few of those securities according to EMH? Or did I misunderstand this answer:
Which I interpreted as 'higher risk means higher risk adjusted return'.

This is a theoretical discussion. Yes, sellers take on more risk, and that should be baked into options price. But I'm curious to see what study you're referring to regarding selling stradles.

Define what you mean volatility is "overstated".


MPT does not apply to option EV. An option is not an asset, it's merely a contract. Take a stock with 0% growth and d% dividend yield. Prove to me that I sell a put expiring on ex-dividend date, hold the position until expiration, and can obtain some positive EV.

I don't think I need to worry about who among us looks like a clown, when the best name to describe yourself is "stinkypete".


Didn't notice until a second pass. This is also wrong. The existence of theta has nothing to do with the EV of an option.


So the guy willing to buy an option is risk-averse, but not the one willing to sell the option? And usually the guy willing to buy and the guy willing to sell is the same guy, i.e. market maker, at the same price around a few pennies.

grim, there's lots of material on derivatives pricing out there. go learn.

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You can buy stock, a, b, c, d, e, f, g, h, i, j, and k. Which one(s) are you going to pick instead of buying a basket of all of them?

Since we are pretending EMH is true, they are all priced appropriately. I'll let you know whether you got lucky or not in your picks in five years. If you want, I will also let you know the annualized returns and volatility in 5 years. Based on the knowledge that I will let you know those numbers in 5 years, which one(s) are you going to purchase today? If it helps, I can inform you that as of today, stock j is priced at $13.97.

EMH says that you aren't smart enough to figure out which of the above stocks has higher potential reward. If you think that high p/e is good, then EMH says you are a fool. If you think that low p/e is good, then EMH says you are a fool. If you want real return-less risk, you can buy stocks of companies that just filed for bankruptcy (those should have huge risk), but that would be just silly.

You are combining too many thoughts together. You can eliminate security risk by diversifying. Diversifying leaves you with just market risk. Diversifying is pretty close to free, which is nice. EMH implies that this is a good idea.

If you wanted to diversify within a market segment, then you are left with segment risk plus market risk. EMH implies that this is not as good of an idea as fully diversifying.*

It costs money to eliminate/reduce (market and security) risk by purchasing puts (or any sort of insurance). If this were not the case, then you could buy the underlying and puts and guarantee yourself a profit.

*I know we are assuming EMH to be true for the sake of discussion, but one of the problems with EMH is that over time value tends to do better than growth, small tends to do better than large, momentum also does well, and (the really weird one) low volatility stocks tend to outperform.

That isn't nice. You should encourage him to insure his portfolio buy buying loads of puts.

Or at least encourage him to buy VIX futures.

Nice dodge.

Which all have 0 cost right?