/biz/ - Business & Finance

>>19240597
Bumping for interest. I've always assumed not though as the lack of subjective variables involved in the formula combined with how well-known it is would probably prevent any kind of actual market advantage from occuring .

>>19240597

its basic, but its used in many more places than you would think

>>19240791
Everyone knows to buy low and sell high but there will always to be opportunities to buy low and sell high. The market is still irrational more often than it is rational no matter how many people know that fact.

>>19240597
>If so, what are the characteristics of the options that it is most reliable/accurate with? Short term or long term, stocks with high or volatility, etc.

BSM has limitations since it doesn't take into account early exercise (for American-style options) or dividends. Other than that it's just a model, only as good as the inputs used. The only unknown input in the formula is volatility, which is why trading options is sometimes called trading volatility.

>>19240597
BS is only a normal distribution approximation, and is based on a positive risk free rate calculation, which is about to disappear

>>19240597
Slightly unrelated but the creators of the Black Scholes model founded a hedge fund that was doing well and attracted a lot of investors, and then no joke went bankrupt in a single day when the Russian government defaulted on their debt.

The moral of the story is that super smart people create these elaborate formulas to price assets and hedge risk, but at the end of the day they can be wrong. So to answer your question is yes, as a rough gauge to the fair price of an option but it’a not perfect.

>>19240597

Its used in some parts, but its really just a baby model.

FO traders use Heston for equities, sabr for IR, for CDS a jump-diffusion process is used (most don't even have a name bc each quant has their own model).

What you don't seem to understand is that it's just a model. The data to fit the model comes from the market, i.e. you take the price for a set of options across different maturities/strikes and calibrate the model parameters such that the prices that your model spits out actually are aligned with the market. You don't really have any more insight...

Except that you now have a vol surface. What can you do with that? Well.. You can model a vol surface with time-dependency and you can start doing some arbing. Bergomi has some papers on that, see e.g.

https://www.semanticscholar.org/paper/Smile-Dynamics-IV-Bergomi/e16585b9f6806251f0318537092e549de2484eb5


t. Quant in an investment bank.

>>19240597
The institutions will use it, so that when things go bust they can claim that no one could have predicted this. That they are victims. And that they should be bailed out.

It's assumptions in it's most common form don't hold. Though it can be modified so they do.

>>19241473
LTCM had a ridiculous strategy where they would find a tiny edge and then use leverage to make big money off of it. Effectively they were extremely short volatility and anyone (who could see their positions) could have predicted they would not survive a decade or two.

Also, interestingly the Black-Scholes model was found and used much earlier Ed Thorp. His hedgefund Princeton-Newport didn't have such flaw.
There are also books written as early as 1850 about the pricing of options. All that Black, Scholes, Merton did was make the methods acceptable to the academic/literature system.

good thread.
>>19241890 where can i find volatility surfaces for bitcoin? i know i’ve seen them before but skew.com doesn’t seem to have them