One of the most fascinating things about working on a trading floor is that models such as BSM transcend their normative aspect and become mental models. Pricing an option? Basically only two things matter: where the underlying asset forward price is at maturity (this is related to the concept of drift) and what the volatility is. At any time, your job is choose “bumps” (which you add to market prices) in order to maximize your odds of making money on a trade subject to beating your competition on price. There are some people who make a living making these markets who likely have never heard of “Ito’s lemma” or diffusion equations.
Whenever the maths says so - the range you suggest is due to dividends typically collectively paying slightly higher than the risk free rate. Were we to have higher rates and companies not paying dividends en mass then that would be a negative number.
How often? I would guess often - especially over the ~100 year history - and not something you would want to have wrong when writing billions in options.
Thank you. I was wrong and thought "/ES contract 24 months out will show what investors/market makers/whoever think the market will grow to in 24 months"
I didn't realize it was exclusively (as you said, dividends + ~risk free rate).
Is there anything that you are aware of options chain wise (for example, a call 12 months out or 24 months out) that holds any statistical accuracy/merit in "oh, the market collectively thinks S&P will end up around this price range by this time period?
If collectively the market thinks the price will be 7,000 in a year then the market will collectively buy it now and will continue to do so until it is 7,000 now. The collectively expected price in the future is the FV of todays price.
> If collectively the market thinks the price will be 7,000 in a year then the market will collectively buy it now and will continue to do so until it is 7,000 now.
That's for boring dollar cost averaging.
I was saying, is there anything we can look at "proof" on the options chain or futures contracts on what people/"the big boys" are "hedging for/against"?
