In most option pricing models & formulas for greeks, we see a component of random walk and Brownian movement. This component is r minus sigma squared divided by 2.
Today, Tom Sosnoff and Tony Battista are joined by Tom "TP" Preston as he explains this formula. This is important as it has many implications on how returns are realized. Additionally TP explains how no matter what, volatility will decrease returns. He goes over a great example to show that two year movement can have an average of 0% but the return will actually be negative.
TP goes on to explain how sigma is the driver of a two sided market. The guys discuss how you can easily find sigma when an option is liquid as the market will be tight. The wrap up the segment by explaining that most analyst believe that they can predict r but this is actually extremely difficult. Instead, you can use the option prices to get sigma and have a better prediction of the underlying!
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