Looking at the world through the eyes of options traders

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Looking at the world through the eyes of options traders
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They have to keep one eye on the most likely outcome and one eye on each of the best and worst scenarios

knows, or has bored you silly, about the third eye. It is the imaginary oracular organ you develop as a side-effect of taking hallucinogens. The data from hazy late-night discussions in college dorms in the 1960s are quite clear on this. The strait-laced are too middle-of-the-road to grasp what is really going on in the world. The third eye allows you to see what they simply cannot.

To understand why, imagine you had to bet on the height of the next man to walk into the coffee shop you are sitting in. A good guess would be 1.75m , which is the average height of an adult male in America. It is likely that you would be wrong, but not by a whole lot. Many of the men who could walk in will be close to average height; very many will be an inch or two below or above it; and only very few will be a lot shorter or taller.

The level of implied volatility depends on the weight of buyers and sellers. Vol sellers in effect supply insurance. They are betting on the middle, that the world will stay regular and normal, or become more so. People active in the options market describe all investment strategies as if they were options trades. To buy corporate bonds with low spreads, for instance, is like selling volatility: you get a low premium and cross your fingers it doesn’t default.

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