Intrinsic value was a poor choice of words. What I meant was "true" price, which we can assume is mid price for liquid products.

Sent from my SAMSUNG-SM-G925A using Tapatalk

No worries about word choice. I managed to type sell when I meant buy

If puts had 0.0% expected return, then the long-term returns of the Put-Write Index would be 0.0%. That the results are positive is not a violation of EMH.

Just because put write index has been performing well, doesn't mean buying or selling puts doesn't have 0 ev, it just means that the S&P has been rallying. Nor does the S&P have a inherent positive expectation, i.e. there's no law of economics or investment that says the S&P has positive expectation, though we see it as so because of rising profits and inflation.



Sent from my SAMSUNG-SM-G925A using Tapatalk

Wrong.

I don't understand how people who are capable of finding and reading the 2+2 trading thread can think this

This is like saying that AA isn't +EV to play because sometimes someone else flops a set. EV isn't the same as "guaranteed value."

On average, selling puts is profitable and buying puts is not profitable. Same as any sort of risk-reducing insurance.

I expected this discussion to go over at least a couple of people's heads.

Analogy doesn't apply. This discussion started out theoretical, but you're making statistical claims citing the put-write index. If anything, the weak form for EMH dismisses being able to make any inferences of future asset prices based on historical ones.

It was over your head before you started it. Businesses exist to earn a profit, and statistics aside, are also priced to do so theoretically. Growth aside, you're making a claim that public companies should break even on aggregate and that no risk premium exists in your theoretical world, which is absurd.

Lol what? I never claimed that. And it's not my theoretical world, it's financial economics.

It's exactly what you claimed

Where did I say businesses break even??

Right when you started this "debate"... confirmed over your head

"Nor does the S&P have a inherent positive expectation, i.e. there's no law of economics or investment that says the S&P has positive expectation"

And that implies businesses breakeven?! Lol

For starters, read up on general financial economics, EMH and modern portfolio theory before wasting my time.

I'm quite familiar with all that, but you need to understand far more basic things before making the claims you've made in this thread

Sure, once you can prove S&P not having positive expectation implies businesses breakeven.

Anyway, you're likly misinterpreting/misquoting me. This discussion originated on what the EV is of an option is under EMH. I (and someone else) said it's 0, Brian disagreed:

Brian - Buy a put reduces volatility of a portfolio, so it has negative expectation
Me - Doesn't follow, EV and yield are the not the same in a mean-variance context

Brian - Options are not zero-sum, because you can buy a synthetic long which has positive ev
Me - You can't bootstrap and conclude that the S&P has some positive drift parameter.

Brian - Put write-index has rallied proving selling puts is +ev
Me - Not relevant under the weak form of EMH

Yeah, Brian is right and you're wrong.

You're claiming there's no equity risk premium (edit: really, that it's negative since treasurys have positive expectation). Even at today's historically "inflated" prices, an earnings yield still >4% implies there most definitely is a risk premium, unless you think significantly negative earnings growth is the market implied expectation going forward.

Capitalism is a thing for a reason. Read up on it.

Where did I claim no equity risk premium? I said the S&P doesn't have an inherent (mathematical) positive drift, which is a separate statement from saying that S&P is influenced profit and growth expectations.

Otherwise, are you agreeing with Brian that buying puts always have negative expected value due to "capitalism"? Even by Brian's logic, there sure are some dips in the put write index that'll prove you wrong! (Business cycles exist, read up on it.)

Let's also claim that poker is a +EV game because Phil Ivey can make millions at it.

Yes, a correctly priced put has negative expectation because the underlying has positive expectation. This is options pricing 101

A dynamically hedged put had zero expectation, so yes if a stock has positive expectation the put should have negative expectation.

I do think you guys are not arguing in the same page here

The problem is he's on some random page in the fiction section

As others have said, EMH says that profit is commensurate with the amount of risk taken.

edit - and there can be a whole discussion on what constitutes risk

If EMH disallowed "profit" (ie. positive expectation) in options, we could arb by going long the underlying and long a deep in the money put or short a call.

As an extreme example, take a stock index trading at $100 and a 1 year call option with strike of $1. If the underlying has an expected return of 10% over the next year, should the call be trading at $109 today? Of course not. It should be about $99. Options have exposure to the underlying, so they should be priced to compensate for that risk, not at 0 ev.

You could do better (in this fictional world where insurers don't require expected profit to take risk off of your plate) by going long the underlying and purchasing an ATM put. Leverage the **** out of it because you can have 100% downside protection for absolutely no cost!!! We'll all be so rich that we'll each individually own the entire global economy!

You can also add to your profits (over a full stock market cycle) by shorting the underlying and buying no-cost ATM calls! Leverage that ***** up!!!

I'm going to do the long underlying leg with IVV and the short underlying leg with SPY! I'll own the world in now= time at all!!!

Prove this.

This is trivially true, but that's not what he's saying. He's asserting stocks have positive expectation, because "capitalism" you know.


Wow, a new low. No cost, really? Maybe if you spent more time thinking than typing...

Yes. I'm planning on making tons of bets. It is your fictional world. I'm just maximizing my profit in your fictional world. I cannot lose in your fictional world where options have 0 EV. It is fairly simple math.

You do know that theta doesn't exist in your fictional world where options have no EV, right?!?