The vast, limitless world of derivatives is quite complicated and very complex. So join Dr. Jim and dig beneath the surface – uncover some of the more intricate ideas that this space has to offer, and then apply these abstract concepts into your trading.
The classic 80/20 rule, or the Pareto Principle, not only plays out in the world around us every day, but appears to govern stock price movements too.
Most financial models assume a finite variance, but given that stock prices are lognormally distributed with no upper bound, perhaps infinite variance is better...
High volatility is usually viewed as opportunistic for us at tastytrade, but is there ever a situation where more volatility could actually tax our positions? Yes, there is.
Back in 1963, Eugene Fama suggested a Stable Paretian Model be used for the financial markets, and in 2021 at tastytrade, we think he might be right.
Driven by Vanna, with a spike in volatility at tastytrade, OTM strikes will see their deltas rise and ITM strikes will see their deltas fall.
The market is structured to drift higher over time as the forces of Geometric Brownian Motion, the Capital Asset Pricing Model, and Supply and Demand show us.
Even though our mechanics have largely been built through experience and empirics, there exists some high-level, theoretical mathematics behind every move that we make.
Theta is typically thought of as a return metric, but here at tastytrade, we recognize that it has important risk characteristics too.
As stock prices have risen significantly over the years, margins have also risen. But thankfully, the efficiency has remained intact, as premiums have risen, too.
The only way to use probabilities in a continuous space is to shift your focus from points on the curve to areas under the curve. tastytrade explains.
With undefined-risk short premium, our theta is always positive and our vega always negative, but with defined-risk short premium, that is not always the case
Now that we have a Standard Normal Variable that can be standardized into a Z-Score, we can begin to build an Expected Move at tastytrade.
At tastytrade, the Standard Normal Variables that come from the Black-Scholes Model form the foundation for all that we do.
The classic philosophical debate of a priori versus a posteriori has a direct connection to the world of options and how we trade at tastytrade.
Not only does a more active approach to trading make it easier to adjust your positions and respond to market conditions, but the geometric return sequence could effortlessly improve.
The fact that the intercept coefficient is statistically significant indicates that there are indeed unknown factors to volatility that have yet to be discovered.
The market randomness that we all feel every day has mathematical underpinnings that range all the way from heteroskedasticity to random volatility shocks.
The propensity for markets to fall so quickly could be the speed with which market makers drop their bid prices in falling markets relative to raising their offer prices in rising markets.
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