Option trades (Thread)
As a retired options (gamma) trader, I was always fascinated by the fact that options are the only financial product where both the buyer and seller can be happy with a given final price of the underlying.
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As a retired options (gamma) trader, I was always fascinated by the fact that options are the only financial product where both the buyer and seller can be happy with a given final price of the underlying.
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The reason for this seemingly illogical statement is that the two sides of an option trade are not looking at the option trade the same way.
The buyer of the option, usually an end user, buys the option to express a view on the underlying.
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The buyer of the option, usually an end user, buys the option to express a view on the underlying.
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The seller of the same option, usually a professional like a bank, isn’t taking a view on the underlying at all. They are selling volatility. As long as the realized volatility of the underlying asset is less than the implied volatility used in pricing the option sale price,
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the seller can replicate the option for cheaper than he sold it.
The buyer of an option is happy if it ends more in the money than the premium he paid. The seller doesn’t care about the price of the underlying and is happy if the realized vol is less than the implied vol.
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The buyer of an option is happy if it ends more in the money than the premium he paid. The seller doesn’t care about the price of the underlying and is happy if the realized vol is less than the implied vol.
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The result is that the buyer and seller of an option on a volatile asset both win if the price of the underlying moves into the money in a slow steady grind.
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It is also this difference in hedging strategy between the buyer and seller that causes options trading to affect the underlying asset.
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