Is it crucial to understand what you're trading?

surely depends on the quality of the BB and therefore of the traders, but i would think 100%. Seriously, something as simple as BS, anyone would pick that up on the job within a week.

"If you take a sample of 100 option traders, how many of them understand would understand the black scholes formula? how many of them would know how to price an option using a binomial tree? Put-call parity?"

all of them.

"I'm sure not all traders are math geniuses..."

for sure, but the above is not genius territory.

so basically every trader is familiar with martingales, stopping times, brownian motion and discrete/continuous stochastic models?

"so basically every trader is familiar with martingales, stopping times, brownian motion and discrete/continuous stochastic models?"

almost everyone who trades options in anything remotely approximating a senior capacity that i have ever encountered. and even though european options don't have free boundary issues, most european traders are familiar with them.

a better question is about the salesman. what's the relation between an option's delta and the probability of it finishing in the money?

ok couple things 1) delta does not measure volatility, at least not in a direct sense. your delta will change for moves in vol but that's a different story. 2) you will be sitting with an illiquid derivs desk. you will not be trading. this is a good thing as it gives you a chance to learn in a risk free type of environment. just be humble, friendly, helpful and try to add value wherever you can.

good luck and keep me posted. what sort of product, equity, fx, rate?

so i guess i don't even know what delta reallymeasures. time to buy Hull and start reading. anyway i sent you a PM. thanks for all the info.

http://www.investopedia.com/terms/g/greeks.asp

basic definitions

I am starting to read the Hull book (Options and Futures). It's easy to read (not to say that its easy material), but I wish the answers were provided for the questions at the end of each chapter. He give the answers to the more conceptual questions, but not for the quantitative questions.

I know some buy side traders that use options quite a bit, however they are not their primary trading vehicle. I can assure you that NONE of them know anything about brownian motion, stochastic processes.

Furthermore your floor traders at the CBOE i can assure you that Amazon.com/Option-Trader-Handbook-Strategies-Adjustments/dp/0471567078 , and i can assure you that he does not know how brownian motion/stochastic processes relate to options trading.

If you havent noticed from my posts I am one of the self proclaimed LEAST QUANTITATIVE people on this board and I understand what all of the greeks are. YOU WILL BE FINE!

Dont freak out about the math you will be taught and have the opportunity to learn more. If the math part of it interests you im sure they can involve you as much as you possibly want. Similarly if your not interested in being super math intensive there are traders that use it less. Find a mentor that has a trading style that interests you and learn from them.

I have some other books on options & derivatives that you may find interesting. PM is ok.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

In responce to the relationship between delta and the probability that an option finishing in the money.

Delta is also approximately the % chance that the underlying finishes in the money.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

not always. think about a down and out knock-out put with strike > knock-out. Towards the knock-out the delta will increase, as if you're below the level your option is worth nothing but above it is worth the difference between strike and spot. So getting closer to knock-out means higher delta, but surely it doesn't mean higher probability of ending up ITM as you're getting close to the knock-out!

trade 4 size just made my day

haha with what comment made your day. Lol. people think derivative trading is like what you learn in class. Its not, and if you work at that type of desk, I feel for you.

Why the fuck does WSO always have to fucking complicate things. IM talking about a vanilla call or put option not exotic knock out options. Stop trying to one up me. Do you trade Structured products?

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

As Jimbo said, you'd be hard pressed to find an eq options trader that doesn't understand B/S.

Re delta and prob of finishing ITM - delta is NOT the probability of finishing ITM. Look at a binary to get this probability (or simply N(d2) is a B/S world).

Delta is actually the (risk-neutral) expectation of an RV that equals the stock price when S_T>K and 0 otherwise, as a proportion of the accumulated value of the spot price. The probability of finishing ITM is the expectation of an RV that equals 1 when S_T>K and 0 otherwise (i.e. N(d2)).

Above is why I prefer equities. Thanks for the explaination Einstein. I said roughly thanks for going all technical on me.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

I just took the exotic option to demonstrate the concept in a simple way, sorry if that was too difficult for you.

question--

not to suggest you have to be a math genius, but how could you ever possibly deal with a product you don't understand well? isn't that how you find yourself knee deep when shit starts to hit the fan? i would think that the traders who actually do well over the long run are those who don't just make money when it's easy, but manage to avoid losing it hand over fist when things get dicey. how the hell can you manage risk if you don't even know what it is?

then again, considering that banks have lost tens of billions in the past year (w/ single trading groups sometimes responsible for billions of losses), maybe it's not that surprising that there are a lot of ppl in the business (and this board) who think ignorance is bliss...

Hey Jimbo sent you a pm. Hope u can help.

"Delta is also approximately the % chance that the underlying finishes in the money."

for vanilla stuff close enough, but delta is not actually the probaiblity. so remember that it's close, but not exact.

and discountinuous payoffs around a barrier do funny things to the greeks.

Although I don't work in trading, I have a lot of friends who do. And despite the reputation of traders all being frat-boys who are aggressive and don't know much about the math/science behind it, this is not really true these days (nor was it ever, perhaps).

Everything is becoming more and more quantitative... so not knowing the theories/math you mentioned puts you at a serious disadvantage. Friends who did trading internships actually used fairly advanced math for a lot of what they did.

While you don't necessarily use those theories on a daily basis, I think most are likely familiar with them and are fairly quantitative.

I have the Futures and Options text by Hull, I'll try asking my prof for the solutions as I could use them too. Reading through it though is somewhat basic, can anyone suggest a follow up text that might get more quantitative?

"a delta neutral position will not change value if the underlier moves by an incremental amount."

it will change by the amount the delta changes, aka the 'gamma'. to borrow from taleb, the thing we call delta has a little bit of gamma, and the thing we call gamma has a little bit of vega.

increases in vol will increase the prices of vanilla options, or any option where gamma is single-signed everywhere. which would not be true for a knockout. as you approach the barrier, the knockout will get very short vol.

sure, with incremental i meant infinitesimal in a mathmatical sense. gamma is the coefficient of the second order part of the taylor series.