The head of my equity desk came over to my (fixed income) desk yesterday talking about the company stock, now trading at $28 – he felt strongly that it would go down again before it went up much. So strongly in fact, that, after checking the charts on Bloomberg for a second he offered to bet anyone that the stock would hit $24 before it hit $31. It took me about five mins to realize that current options pricing suggested that this bet would be a winner to me (of course, I could have come to that conclusion with a simple assumption of a symmetric distribution of stock returns). So I offered to take the other side of the bet. When he asked me how much I was willing to bet, it took me just another five minutes to tell him “any size up $10mm, because anything larger might move the options pricing – otherwise I can lock in $30 of fully hedged cash profit today for every $100 we wager.” He settled for a $20 bet and felt like he’d been had.
hahah! good job…
pwned!
That’s a cool story! Well done, plyon!
He is probably still thinking about it… : )
I just had to put your firm on our restricted list now too. Just kidding.
Nice!
any size up $10mm whata the 10mm mean? million
either im an idiot or i haven’t read what you have read in the CFA curriculum, because I don’t understand the logic here. can someone explain or reference the study session?
Your point about symmetry is obviously right, but I don’t see how you create an easy, static hedge with vanilla options. It seems to me that the options you’d be swapping are American binary (pay $X at first touch at $24 or $31) with barrier features (knock out the other guy’s option if you get paid first). Even if I’m right (unlikely) it’s still a great story.