It could mean that. "The sun rises in the East" is also not necessarily fact. Maybe tomorrow it will rise in the West.

Intrinsic/Extrinsic value cannot be mathematically improved upon. Extrinsic value is higher than it should be (if options had no EV) with great consistency based on both historical (available when buying the put) and future results (available when the put expires. The consistency of this is absolutely astounding.

I'll grant that 2500 years (starting with Thales of Miletus) of data across every single possible asset class and market might not be the entirety of the story, but it seems unlikely that the next few years will demonstrate that buying puts is 0 EV.

It is absolutely baked into the price of the option. That is why going long the option is -EV.

No one cares about "a" put in this argument. As I have repeatedly said, the reason why puts aren't 0 EV is BECAUSE limited upside and large downside is baked into the price.

Sure, but we aren't worried about your opinion of whether ZN Mar '18 puts are fairly priced. Specific options can be over/underpriced. On average, selling puts is +EV. This is only true in every single market and asset in the entire history of the world.

They don't, on average, have 0 EV. They are overpriced, on average, because the market isn't utterly ridiculous in pricing options in relationship to risk. How's that for a white flag?

Huh? It's not a matter of "could" this or "could" that. When you say IV is always overstated, you're saying it under the assumption that the model (usually Black Scholes) is modelling option price correctly, which is ludicrous. If I build a statistical model and I don't see homoscedasicity in the residuals, there's likely something wrong with the model, and not the phenomenon or data. You do know that IV is a calculated number, right?


No. Again, limited upside and 100% downside does not imply -EV! The price of a put can be calculated/adjusted for the put to yield 0 EV, while obviously still retaining the feature of limited upside and 100% downside.

BSM is absolutely off (it has strange assumptions). The prices are what they are though. You don't need a model to see that the prices for buying a put are consistently (on average) higher than the realized change in price would be if they were 0 EV. Extrinsic value cannot be improved upon by any mathematics and it is, on average, far too high.

This is true for all assets. Empiricism for the win.

It is quite possible that the next 2500 years will undo the fact that puts are -ev on average, I guess. Seems as likely as the sun rising in the west.

The price of a put could be set at 0 EV, yet it isn't. The price is consistently across assets classes far too high to be 0 EV.

Prices are what they are, but BSM is still used to calculate IV..

So you don't have a mathematical argument why puts can't have 0 EV?

And the empirical data you have is the put write index? The performance of put write index can be explained by the performance of the S&P.

Why do you find it so hard to accept that a rational market, efficient or not, compensates for risk?

I have a rational argument. Under no circumstances would it make sense to price an offer to take on all of the downside while getting none of the upside at 0 EV. This is especially true given that one could take on the EXACTLY the same downside risk while getting ALL of the upside potential by just going long.

I'd love to hear how you think you can explain the outperformance of PPUT over the S&P 500 using the S&P 500. The put-write index has outperformed the S&P by over 1% annualized since 1998, and I'm sure you are aware that we've had two major market meltdowns between then and now.

grunching again.

we've been through this before in other threads.

is insurance -EV because the insurance company is making a profit and maybe the salesman is making a commission on it? hopefully, not too large in either case - the commission especially.

insurance is probably $EV and i think it's +lifeEV or +goalEV

one thing to keep in mind about historical talk about options is that commissions and bid/ask used to be horrible. it did used to be gambling for alot of people....

google "portfolio insurance" - synthetic insurance though dynamic hedging - and the 1987 crash. it's very interesting.

one last thing is people think that black swan author is so smart and saavy but he would have waited and/or underperformed at times for a long long time before he had amazing times.

I never claimed I didn't. Buying a put is also risky.

Not rational, more like old. You already brought this up. Again, the price of the option can easily be calculated/adjusted to yield 0 EV. Are you any good at math? Do you know how to calculate the payoff an option?


First, A 1% spread doesn't sound statistically significant for me to consider selling puts as inherently outperformant. Second, they also invest the premiums into short term bonds. Given that Feds Fund Rate was mostly in the 2-5% range in the prior decade, that's a pretty large pick up. Third, this index only focuses on ATM puts. Before making general statements about puts, It would be interesting to how OTM puts perform as well.

You're either being intentionally dense or you need to read up on some of the things you pretended to understand earlier, namely MPT and systematic (nondiversifiable) risk

A 1% annualized difference in returns over nearly 30 years isn't significant?

You do have access to a calculator, right?

1.08^30 vs. 1.09^30. You do see that this is a huge difference, right?

grim it appears you are getting stubborn

the seller of the option is taking on significantly more risk. not only does it make sense that they are paid a premium, but when you backtest, they are. the person buying an option has the cost of the option as their max loss the max profit is significantly larger. the seller has exponentially more risk and your broker reflects this in the exponentially larger buying power reduction in your account. who in their right mind would take on exponentially more risk and chew up exponentially more buying power for a fraction of the potential profit and an even worse ROC with no edge? That doesn't makes sense and this is why it is common knowledge that option sellers are paid a premium. Not only is it common knowledge but backtesting in the S&P and vix demonstrate that implied volatility is overstated when you go back and look at realized volatility over time. This isn't a magic trick or a dirty secret, it makes perfect sense.

People don't like downside volatility. So they are willing to pay a premium to reduce or eliminate it.

That's how it works. You take **** that everyone don't like and get paid as a +ev bet.

Of cause you are free to sell an option so that it is 0ev but these will get snapped up pretty quickly.

For the proof that stock is +ev or selling options is +ev, who really knows. The nature of investing is to gamble with the future and hope for the best.

Re: above two posts (that option sellers are making a +ev bet to compensate for an unpleasant payoff profile - limited upside with big potential downside)

- my dilettante's understanding is NN Taleb got rich buying deep OOM options on the assumption the tails in future price probability distributions for the underlying will be fatter in reality than what option sellers thought they'd be, so the option has a higher value than what option sellers were selling them for and the premium they thought they were getting turned out to be no premium at all but instead a -ev bet for the sellers.

Am I misunderstanding something? Was NN Taleb actually a super lucky donk? Or does this 'volatility smile' mean oom options are now priced with the right model (not one assuming gaussian distributions for future states of the underlying) and you can't be +EV just buying oom options blindly

The volatility smile started showing up after 1987. Markets evolve.

Sure, if you assume positive drift in the underlying, then trivially ev < 0.

You do know the difference between "significant" and "statistically significant", right?

I've already addressed this numerous times. This does not imply that it's not baked into the current market price. As I said, it's not rocket science to calculate a price for the put to yield EV.

The pricing of options in real life doesn't assume positive drift.

Yes. I started out as a statistician. The difference is both meaningfully significant and statistically significant. Statistically significant is a ridiculously low bar.

As the rest of us have already addressed numerous times, IT IS baked into the current price of options. That is the entire point that all of us have been trying to make in your general direction.

See theory and data here: https://www.aqr.com/-/media/files/pa...ry-tickets.pdf

If you have trouble understanding the research paper, please ask for help. I have a love-hate relationship with AQR, so if you can find any weaknesses in the paper, I'd love to see them.

You can't reference MPT and EMH and still reject the idea that investing money in risky market correlated equities has positive drift, on average. It's logically inconsistent and you have to have a gross misunderstanding of at least one of those concepts to make your argument.

Let's say someone bought enough deep ITM calls to get long 10% of a thinly traded companies stock assuming they exercise at expiration. The seller is naked short these calls and doesn't own a single share or hedged it off with another position. Things haven't worked out for the seller and the calls are still ITM with an assignment coming in days. What's the seller to do if he can't trade out of his calls? Asking for a friend...

Not be a fool? What was the plan here? Presumably he has to buy the stock at whatever price he can to deliver?

Yeah, that's why I'm asking... The position doesn't add up given that this stock doesn't trade for any real volume. If there was sufficient volume on the stock or options it's not a big deal. I suppose it's possible selling calls to someone was the only market available and if they wanted to get long a ton of puts the market simply wasn't there. Just wanted to make sure I wasn't missing some painfully obvious scenario.

Lol, this isn't hypothetical? One thing to note is that the MMs typically have very deep pockets so they're ok with taking a hit or having some exposure from time to time. But AFAIK at least a more liquid stock, if you buy calls, they are simultaneously buying stock

I understand those concepts well, actually. Well enough that I've actually implemented them at work. I work at a fixed income firm so I'm usually thinking in those terms.

Probably the majority of people who "use" those concepts at work don't actually understand them. From this thread it's clear you fall into that category.

Where do you get that from?

And don't hate just because your unemployed.

V convincing debate strategy

Keep working for the man and eventually you'll learn about capitalism, investing and the pricing of risk