24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Appendix A: Choose Your Battles Wisely • 281
|
||
generally the volumes are light because the people in the option
|
||
markets generally are not willing to wait longer than 60 days for
|
||
their “investment” to work out. Because the time to expiration for
|
||
most option contracts is so short, the difference between the BSM’s
|
||
expected price based on a 5 percent risk-free rate and an expected
|
||
price based on a 10 percent equity return is small, so no one real-
|
||
izes that it’s there (as seen on the first diagram).
|
||
2. The market makers are generally able to hedge out what little ex-
|
||
posure they have to the price appreciation of LEAPS. They don’t
|
||
care about the price of the underlying security, only about the size
|
||
of the bid-ask spread, and they always price the bid-ask spread on
|
||
LEAPS in as advantageous a way as they can. Also, the career of an
|
||
equity option trader on the desk of a broker-dealer can change a
|
||
great deal in a single year. As discussed in Part II, market makers
|
||
are not incentivized in such a way that they would ever care what
|
||
happened over the life of a LEAPS.
|
||
Congratulations. After reading Part I of this book and this appendix,
|
||
you have a better understanding of the implications of option investing
|
||
for fundamental investors than most people working on Wall Street.
|
||
There are many more nuances to options that I discuss in Part III of this
|
||
book—especially regarding leverage and the sensitivity of options to input
|
||
changes—but for now, simply understanding how the BSM works puts you
|
||
at a great advantage over other market participants. |