MIT 15.401 Finance Theory I, Fall 2008 View the complete course: ocw.mit.edu/15-... Instructor: Andrew Lo License: Creative Commons BY-NC-SA More information at ocw.mit.edu/terms More courses at ocw.mit.edu
Reference to Abel-Ruffini!!! Can this course become any more interesting!!! Although he says that there are no formulas beyond cubic, actually there is formula for quartic equations. It is when you get to fifth order polynomials and beyond that there is no general formula.
I'm looking for a lecture from MIT about SELLING options. I would like to see more about seeking long theta. If the Brownian Motion explains the random walk of a stock and black-scholes is a decent approximation to value options, one should be able to SELL out of the money options during high Implied Volatility environments. We should be able to take this idea farther in terms of buying Calendar Spreads and managing Vega. Thoughts?
Seven years on may be too late but I recommend a book by Nasser Saber called "Speculative Capital & Derivatives Vol 2". His idea is that options are not so much the right to buy or sell (which only apples to the holder) but are merely a forward contract where one side has the option to back out by pre-paying a statistical estimate of what they would have been likely to lose. He also talks about the movement of stock prices NOT being random, but being an in-built feature of the logic of a stock in the first place, this then leading to the reasoning of Black-Scholes, which couldn't work if prices were truly random..
45:26 Actually there is a formula for a 4th degree polynomial. There is, however, no formula for n >= 5 in general. To read more about that check Abel's impossibility theorem and Galois theory.
@17:30 that's not quite true. if you sell a covered call, your losses aren't unbounded. you only miss out on potential profit. for example i bought 100 shares of CPB stock at $45. then i sold a call at $47. the price went up to $49. my option got exercised and i had to sell my 100 shares at $47, so i made $200 in profit, when I could have made $400. sad day for me. but i still MADE money in the end. I didn't actually 'lose' the extra $200, i only missed out on potential gains. theoretically, losing $200 and not gaining $200 are the same thing, but in reality and in your bank account, that's VERY different. i wish he had focused more on the selling of options, since buying options is very risky business akin to gambling imho. but i understand that options trading is easier to understand from the buyer's perspective than the seller's.
Professor, [@time 13:13] isn't that the MAXIMUM payoff for put =20? Given Ex Price $20, maximum payoff from a PUT should therefore sensibly be Pt ~ max [ 0, K - So], when So=0.....?
This is the most sophisticated instrument for me to retake nimbly and regurgitate over and over again. Yes, this video is the most rudimentary but essential for me to jump into this unknown water that looks like either swamp, quicksand or the ocean. At least I got Prof Lo's safety vest and I can carefully to "test" the water....Hahaha, a good lecture in strict COVID isolation period in Down Under......STF.............
25:34 why is the payoff 0 when the price drops under 50. when we sell short, we get $60 and we need to cover our position so if the price drops to let's say $40. we don't need to execute the option but don't we need to buy the stock at $40 from the market and return the underlying security?
I could not understand that part completely. If the current price goes down to prices less than 50 then it will not be profitable for the buyer of call option. That's why it is zero For the second part, there is 60. Individual may think that the range will be between 50-60. But there might be some people who believe the price will be much more, for instance 80 90. And they will be willing to buy this call option. So, after 60 dollars the graphics is also bounded. Idk, if I understood in a right way 😶
I guess i catched it. In order to reduce the cost of call option at 50 dollars, individual shorts it at 60 and gives up the unlimited part(where he/she could get more profit)
Small correction: the professor states that "there are no more formulas beyond the cubic". However, there is in fact a quartic formula for solving general fourth-degree polynomials, and there are no more beyond that.
