When volatility doesn't matter

When you first learn about options, you soon start to realise that there are a hell of a lot of things to learn. In fact, its a bit of a bottomless pit. You could spend years and years getting into the arcane calculations and eventually be as good as a quant.

But you have to ask yourself, am I am mathematician or a trader. Sure you have to be a bit of both, but it would be far more profitable to be a good trader than a good mathematician.

For example, a mathematician looking at an stock put option might say. Hmm, is the implied volatility higher than the historical? Yes, so in theory a good reason for selling it. Ok, now lets look at the greeks (the values that determine the properties of the option). Hmm interesting, the delta is bigger than it should be.

In fact, he will examine all types of things surrounding the option and come to the conclusion that historically, now would be a good time to sell it and take in some premium. So he does

But from the trader's perspective, it might be completely different. He looks at the put and says hmm, thats high. Why is that ? Does a bit of research into the company and sees that its results are due out soon. Does some more digging and sees the fact that the company has increased its debt in the last 6 months and that it was done on a floating not fixed rate. As interest rates have moved up twice in the last 6 months AND it was a substantial amount of debt that was taken on, this HAS to impact profits. So he says I will buy the put option even though it's not good value.

Day of reckoning
The results come out and wham! the share price drops 10%. The trader HAVING LOOKED AT THE COMPANY made the money. The mathematician HAVING LOOKED AT THE OPTION lost.

Was this a random occurence? Would the share price have dropped anyway? Who knows? But one thing is for sure. I would rather be a trader than a mathematician.

The company is the dog and the share/option price is the tail. Make sure you know the dog before he bites you in the ass!