35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
272 • The Intelligent Option Investor
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It is important to realize that the fact that options are usually
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efficiently priced in the short term does not prevent us from transacting
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in short-tenor options. In fact, some strategies discussed in Part III are
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actually more attractive when an investor uses shorter-tenor options or
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combines short- and long-tenor options into a single strategy.
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Hopefully, the distinction between avoiding short-tenor option
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strategies and making long-term investments in short-tenor options is
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clear after reading through Part III.
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Fungible Underlying Assets
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Again, returning for a moment to the foundation of the BSM, the scholars built
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their mathematical models by studying short-term agricultural commodity
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markets. A commodity is, by definition, a fungible or interchangeable asset;
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one bushel of corn of a certain quality rating is completely indistinguishable
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from any other bushel of corn of the same quality rating.
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Stocks, on the other hand, are idiosyncratic assets. They are intangible
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markers of value for incredibly complex systems called companies, no two
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of which is exactly alike (e.g., GM and Ford—the pair that illustrates the
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idea of “paired” investments in many people’s minds—are both American
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car companies, but as operating entities, they have some significant differ-
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ences. For example, GM has a much larger presence in China and has a
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different capital and governance structure since going bankrupt than Ford,
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which avoided bankruptcy during the mortgage crisis).
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The academics who built the BSM were not hesitant to apply a model
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that would value idiosyncratic assets such as stocks because they had as-
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sumed from the start that financial markets are efficient—meaning that
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every idiosyncratic feature for a given stock was already fully “priced in”
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by the market. This allowed them to overlook the complexity of individual
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companies and treat them as interchangeable, homogeneous entities.
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The BSM, then, did not value idiosyncratic, multidimensional
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companies; rather, it valued single-dimensional entities that the scholars
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assumed had already been “standardized” or commoditized in some sense
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by the communal wisdom of the markets. Y ou will see in the next sec-
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tion that the broad, implicit assumption by option market participants
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that markets are efficient actually brings about the greatest opportunity |