
A guide to pricing and hedging (2003) [pdf] - melenaboija
https://ieor.columbia.edu/files/seasdepts/file_attach/BoysGuide.pdf
======
zdw
What's the benefit of these fancy financial instruments other than for someone
who wants to enjoy a slower, higher stakes version of the roulette wheel at a
casino (assuming the Boglehead wisdom that individual stock picking is about
as reliable as that)?

~~~
totalZero
Hey, this is a good question. I have worked as a professional options trader
at a major investment bank, and I would answer this a few different ways.

1) Derivatives allow you to tailor your risk to the precise component of the
market that you have a view on. If you think the stock is going to have a
large move (either up or down) in the short term, it's tough to express that
view in the stock. If you buy stock, you lose money on a down move. If you
sell short, you lose money on an up move. So, you can buy short-dated put and
call options together (nicknamed a "straddle" if they have the same exercise
price, and a "strangle" if the put exercise price is less than that of the
call) and you capture not only your view on what the stock is going to do, but
also the timeframe in which you expect that move to happen.

2) Options cost less than stock, so you can lever your position. Let's say a
stock trades at 100 and you want to buy a hundred shares. Ignoring interest,
that position costs you 10,000 dollars. If it rallies to 110, you make 1,000
dollars, or ten percent of your capital outlay. But if you buy a contract of
50-strike calls, you pay around 5,000. If the stock rallies to 110, you make
1,000 dollars again, but that is 20% of your capital outlay.

3) Derivatives have more factors involved in the valuation, which makes them
complicated. This is a battleground where smart people who are willing to work
hard can find inefficiencies and make money. Stocks have more people looking
at them, and are more simple, so they may not offer the same opportunities for
profit depending on your skillset.

4) Options serve a tax purpose. If you have a long stock position that you
have held for six months and profited from, but the company has earnings and
you don't want to risk losing money on a potentially bad quarter, you could
sell your stock and pay short-term capital gains tax. Or, you could sell calls
to buy puts and maintain your stock without having to pay tax on your stock
gains yet. If the difference between long- and short-term capital gains tax is
greater than the cost of the options you buy, then you could be saving money.

Amazing to me that the "why is the title gender normative" comment has gotten
traction, but you've been downvoted. The internet is strange.

~~~
zawerf
I think your example in 4 doesn't work.

I had a similar problem during an IPO lockup and couldn't sell when the stock
was at a high point. If you buy protective puts (for the collar), it would
reset the long term capital gains clock on your long position. I would love to
be wrong so I can regret/cry about it!

~~~
totalZero
> If you buy protective puts (for the collar), it would reset the long term
> capital gains clock on your long position.

Yes, this is true.

However, it doesn't force you to pay taxes at the higher rate, only to wait
longer before the lower rate applies. Once you dispose of the put, the clock
resets. But if you continue holding the stock for greater than a year, then
the only issue is that your dividends may be taxed more.

On a large-cap name, one thing that some people do is to use a well-correlated
index or competitor for the hedge.

In your lockup, I'm betting there were some restrictions on hedging anyway,
which may have prevented you from buying puts at all.

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DiseasedBadger
This is so cool. It's like the boy's king Arthur of finance. I get a fair few
channels and podcasts on engineering and such, but I haven't found a lot of
good approaches to financial topics. This is great.

Thank you!

~~~
bluejellybean
Check out the book "Options, Futures, and Other Derivatives" by Hull, it
covers a huge swath of financial instruments.

[0] [https://www.amazon.com/Options-Futures-Other-
Derivatives-10t...](https://www.amazon.com/Options-Futures-Other-
Derivatives-10th/dp/013447208X)

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ahvetm
The mus and sigmas in this paper on risk modelling would not make Nicholas
Taleb very happy

~~~
0003
I think he would be more offended on the general idea of risk model. His
conclusion: we can't do it. Don't model risk. Set yourself up to benefit from
our inability to do it.

~~~
o_nate
If you are a large bank, I don't think that the regulator will take kindly to
the statement that you don't model your risk since Taleb says it's not
possible. Perhaps a more moderate position would be not to put too much faith
in models. Or as Derman writes: "Models are only models, toy-like descriptions
of idealised worlds... If you listen to the models’ siren song for too long,
you may end up on the rocks or in the whirlpool."

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cs702
From OP:

 _" If you want to know the value of a security, use the price of another
security that's as similar to it as possible. All the rest is modelling. Go
and build."_

Buffett:

 _" Price is what you pay; value is what you get."_[a]

\--

[a]
[https://en.wikiquote.org/wiki/Warren_Buffett](https://en.wikiquote.org/wiki/Warren_Buffett)

~~~
JumpCrisscross
Time horizons are important. Buffett's capital comes from insurance float.
That's very long-term capital. He can afford to buy an asset and let its cash
flows pay him back.

If you're balancing an options portfolio, on the other hand, shorter time
horizons matter. If the stock pays back in 10 years but crashes in one, the
ten years don't matter for the holder of a 12-month call option. Thus finding
symmetries becomes more relevant than fundamental analysis.

~~~
cs702
Yes. Couldn't agree more.

Arguably, one could call the long-horizon, volatility-ignoring approach
"investing" and the short-horizon, volatility-sensitive approach "trading."

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factsaresacred
Easier to read format here:
[https://poseidon01.ssrn.com/delivery.php?ID=4850640270650730...](https://poseidon01.ssrn.com/delivery.php?ID=485064027065073074094076099018118107041048072043057026110092113090118025117010036040042016121077092099120030110051014037021017022027098088005112008074004109007044039005019101117091019075093125014001094031070075101125108003007077087066121104013&EXT=pdf)

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mlevental
I saw this guy speak at the yale club or something in midtown (NYC) in 2017 on
risk modeling. at the time he was arguing that what the industry needed was a
return to fundamentals and more intervention from traders ie the algos had run
away. I haven't read the article but seeing as how he was one of the first
mathematical quants on the street I wonder if this from 2003 is contrary to
his opinion from 2017.

Here's his book. I haven't read it but it's probably interesting.

[https://www.amazon.com/My-Life-Quant-Reflections-
Physics/dp/...](https://www.amazon.com/My-Life-Quant-Reflections-
Physics/dp/0470192739)

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todd8
I was happy to see this because of my interest in the subject, but I can
understand that the title is a bit off-putting.

A bit off topic anecdote: a few years ago, while floor trading was still
important on the Chicago Board of Trade, I was getting a tour of the floor
during trading hours and my guide, a very experienced commodity trader,
pointed out a fellow trader that had made the largest trade in history; it was
a woman.

~~~
samnwa
It's almost as if sometimes women do things and then other times men do
things! Who would have thunk it??

~~~
shearskill
The actual title of the article is “A Boy’s Guide to Pricing and Hedging”. If
you read the link, the above comment is more relevant.

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kokke
My personal

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vfc1
The title subtly but still obviously implies that finances and investing are
men's business, and not women's. I don't see how anyone can deny that.

I bet that many women reading this title that work in finance don't appreciate
the title one bit.

The argument that it's just a joke is not acceptable, because this together
with other 1000 similar remarks, or "jokes" or micro-agressions will make
women choosing that field as inadequate over time.

This is actually a scientific fact, that people that are told several times
that they are not able to do a task or don't belong performing the task will
underperform doing that same task, when compared to people that are not
subjected to that treatment.

Words are powerful, I wouldn't want my two daughters to put up with this type
of bullshit growing up.

~~~
dtwest
The women in finance I know have much thicker skin than you think. They also
put up with bullshit that is not on the same scale as this benign title.

Complaining about the little things can hurt the bigger cause if you piss
people off in the process.

~~~
vfc1
It's about the impact of 1000 little things.

~~~
michael-ax
The thousand little things seem to be experienced on your end. That this makes
you condemn an author for his choice of headlines - when you've said nothing
about the substance of an article - makes it seem like you have no guy-group
to hang with. Get one! It'll clear up the perspective the guy's coming from.

~~~
ColinWright
There are fields that are currently over-whelmingly dominated by men. If you
are a man, and you are in these fields, it seems like women just don't want to
get involved.

But if you start looking with fresh eyes you start to see again and again and
again small things, apparently insignificant things, that all combine to say
"Women aren't welcome here." This is a single, simple, tiny, apparently
insignificant example, but it's utterly ubiquitous.

Your dismissal just makes it clear that you either haven't noticed, or don't
care. It's a sobering thing to realise that there is just so much subliminal
repelling of women from fields such as finance, programming, physics,
mathematics, engineering, and more. If you start to listen to women instead of
just saying "it's all in your head" then you'll learn something.

And it's horrifying. I always feel guilty that when I get tired of the fight I
can give up for a while. But that's because I'm a cis-het white male, and the
system is biased in my favour. Others can't choose to give up - and it's
relentless.

