Casino Games as a model for Options

Background:

Options are an agreement to own (or give up) an ‘asset’ at some future time for an amount of money agreed upon today. If i want to own ‘asset’ i purchase a call if i am willing to give up ‘asset’ i sell a call.

So if the options were a horse, and  ignore  the fact i can buy multiple tickets for one horse [advanced strategies];

There are 8 possible outcomes (P,L) based on  :  ( Put, Call ) * (Buy, Sell) * ( Up, Down ).  the first two i pick, the last is price movement of the asset for which we can play with predictability .

The short options are bought with the hope price goes down, and sold with the hope price goes up

Game Objective:

Options pricing  in novitiate terms is F( p1, p2, A1, A2, t ).   If i believe the ‘asset’ to have price p2 at some time t from now and it’s price now is p1 what do i want to pay (or collect) from  ‘lets make a deal’ to buy (or sell) that   asset in the future.

What are the A’s you ask ?.  I  suppose they are the unknowables. the underlying `value` of the Asset,  or news items about the asset maybe just news items that effect the asset.  Black-Scholes is a differential equation that attempts to tie these together, but is more about volatility than say time or distance to price, and volatility is a concept i’ve studied for some 30 yrs and still can’t make sense of. Keep in mind that even adjusted for inflation the long term trend price  (devoid of volatility)  is indeed up.

Casino:

This could be where you trade your options, or it could be the market (button tree) where you choose that your underlying Asset is  traded (priced) ie. who determines the price ? So lets look at DJIA well known, rationally priced, and reflective of the market (and indeed the country) as a whole.

Game Boards:

Roulette or craps let’s hope each option is better than a slot pull !. I am not a big believer in using other’s game boards. Back testing and all that are each houses (casinos’) attempt to draw you in. ‘Trade with me in my house I am better’.  To wordsmith a phrase “tools for fools”. What is my idea of a game board ? well i decided on djia so here is a sample http://nomenware.net/cgi-bin/dog.php

The tactics seem simple (ala Nasim Tabeb)  find the extremes in some catagories (columns) and then make appropriate bets .   I hinted in my last post how one might get the computer to do that. The usual caveats apply i won’t be responsible if you put all your chips on red or green, but hey it’s a game strategy i designed so that’s what I may do !!

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