New York, New York, USA
Posts: 38 since Jun 2016
Thanks Given: 15
Thanks Received: 47
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I think the examples given understate how bad the odds are.
The example correctly identifies that the CME provides this market and gets paid an exchange fee, and the FCM introduces retail traders to the market and gets paid a commission, and these expenses affect the returns on the trade.
However there is another party who needs to be paid: the seller of the option.
When I looked at these on the Tradovate app, there was no DOM where all participants could put orders at the prices they were willing to trade. There was an offer on the call, and an offer on the put: take it or leave it. And there has been an appalling lack of transparency with respect to who is providing these prices and what rules they must follow.
But it’s pretty clear that if they are not receiving an explicit fee, then they are getting paid out of the price of the option. They are not taking the other side of your bet at fair value. The example over simplifies by saying when you pay $10 it’s a 50/50 bet. That’s not correct. When the market maker is willing to sell you that call for $10 you can bet the fair value is more like 9.50 or less. In other words, when the market maker will sell you that option for $10, their model says the odds of that option ending in the money are less than 50%.
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