| Topic Name: |
Derivatives |
| Message Name: |
k... |
| Date Posted: |
05/10/2003 |
| In Reply To: |
Hey ficc, you must be the expert on this or something.
Here's what I'm trying to get at: when you're writing an option, you base the price on the payoff (right?) Now the payoff, what's that based on? speculation and assumptions? If in the end you're just speculating on the payoff, aren't the two jobs similar(i.e. equity trader, derivatives trader)? I remember once before you stated that the money to be made is due in part because the other side doesn't know the math. But the math is based on speculation! (right?) So if its all speculation, why would one go into derivatives trading as opposed to equity trading?
Granted, I'm learning about this stuff now, so please point out all flaws. |
| Message: |
one thing you need to keep in mind is exactly what derivatives are. they're financial instruments that derive their value from some underlying asset, whether that be EQUITY, DEBT, CURRENCIES, or COMMODITIES.
so what i'm saying is that one wouldn't "go into derivatives trading as opposed to equity trading," because they can be one and the same thing. say i'm trading equity options - then i'm a derivatives trader (options are derivatives), and i'm ALSO an equity trader (because equity is the underlying asset). simple stock trading (i'm not sure if this is what you were referring to when you said trading equities) is a little boring in my opinion...there's just a lot more speculation and effort involved in pricing an option than just making a buy/sell spread.
in response to your question-yes, when pricing an option, you do it based on speculation of the payoff. gastrader was right on the money (or in the money? :) ) when he said that most places use the same models, but the disparities in valuation occur based on different assumptions and effects those assumptions carry.
i'm not sure if i exactly said that the money is made b/c the other side doesn't know the math, but this does happen a lot, especiall when you're dealing with investing in derivatives on BEHALF of certain corporations. structurers are SPECIALISTS, and you can bet they know a lot more about pricing than anyone at some other corporation that are including derivatives in their portfolio (e.g. commodity - e.g. oil, derivative (swap?) for an airline). then there's some serious damage to be done, because if you say such and such transaction is in their best interest, they'll probably trust you, because you're the expert.
|
|
