Dr. James Schultz has made several previous appearances on the network, and is now hosting his own show From Theory to Practice.
From minute one of his new show it becomes *crystal* clear (Jack Nicholson-style) that tastytrade's newest recruit is here to make a statement.
Taking on the topic of hidden inefficiency in the markets, "Doc" Schultz challenges one of the more prevalent sentiments at tastytrade HQ that the market is "perfectly" efficient. He draws on his PhD in finance to help illustrate that some key assumptions embedded within the Black-Scholes options pricing model may indicate some "hidden inefficiencies.”
Guiding viewers through a brief construction of the Black-Scholes model, Dr. Schultz describes the inputs into the model.
- Stock Price
- Strike Price
- Risk-free Rate
He targets "volatility" as a weakness among the model’s inputs. The good Doctor (also tastytrade's biggest Boston Red Sox fan) suggests that overestimating how volatile a stock’s price will be is why implied volatility so often trades above realized volatility.
Stated simply, the market's anticipation of how much the stock might move is greater than what actually happens.
Given that tastytrade research does in fact show that short premium trades have a high probability of success because the market moves less than volatility predicts it will, it confirms what Dr. Schultz is saying.
We invite you to watch the entire first episode of From Theory to Practice to make your own assessment on Dr. Schultz's conclusions.
Additionally, his show runs live everyday on the tastytrade real financial network at 1:15pmCST (all archived episodes are accessible here).
As always, we hope you will follow up with any questions or comments.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.