Sorry for my delay, I was unable to respond.The same question applies to the buyer. Both parties can hedge their options exposure with the underlying. The math reduces the optimization problem to a bet on volatility surfaces for both sides of the trade, including jump risk as JackoC mentioned. I'm not sure how the latter can be mathematically included in the framework of stochastic calculus, but I think that is just a technical detail that is not essential to the question and the reasoning at hand. Let's just say it's a bet on the stochastic process, that results in the volatility surface.Would you agree to go with me for a moment?
1. The only figure that does not have a source in the Black-Schulz formula is predicted volatility, right?
2. By what is the predicted volatility estimated?
3. If on average the seller of the option receives only his investment, what does he sell the options for?
Maybe I'm just wrong about one of these questions, correct me if I am. Thanks.
This question does not apply to the buyer because it is John Smith who is about to retire in the coming year, and is afraid that his portfolio will fall sharply that he cannot bear. On the other hand, he still wants to get the average return of the market, so he prefers to give up a bite of the unguaranteed return to hedge his risk of a big fall.
Statistics: Posted by y1980 — Thu Jun 13, 2024 6:30 pm