The Trillion Dollar Equation - How options are calculated from mathematical pov

I have learned a lot by watching purely mathematical point of view of options and any other derivatives. There is one cool quote from one of the viewers in feedback section of Youtube:

“When a physics channel explains F&O better than any finance channel” - CassyZee

To encourage you - there are interviews with guys who were Noble prize winners in Economy, doing 66% returns year over year :slight_smile:


Good video! The autist in me wants to point out that there is no Nobel for maths, there’s the Fields medal :slight_smile:


Thank you for pointing this out - allow me to edit it. I meant, Nobel in Economy.

Ever heard of Long Term Capital Management? :upside_down_face: They even had one of the “inventors” from the Black-Scholes Option Model. Read “When Genius Failed”, quite a good read, showing that being a genius doesn’t necessarily help in the investment world.

Also better to read “Richer, Wiser, Happier” instead of watching math about investing imho.


I appreciate your reply, nevertheless I like trading. Teaches me thing or two. And thank you I am doing very well, on all levels you have mentioned:

  1. Richer - yup
  2. Wiser - yup
  3. Happier - yup.

It’s still a great read, with wisdom from the best investors of all time like Warren, Joel, Howard, etc. You can definitely learn a lot from them as well :wink:

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I know all those names very well :slight_smile: and thank you for the recommendation. Already downloaded. Seems like a worthwhile read.

I enjoyed* this**, thanks for sharing!

The only additional comment I would add: in my personal practical experience, implicit volatility is where most of the pricing (and money to be earned/lost) in options happens, which is in turn mostly governed by investor psychology, not brownian motion (maybe they’re the same thing :wink: ).

* Slightly biased as a math affine physicist.
Since we’re sharing videos in this topic, let me link to the very recent farewell lecture video of Giovanni Felder, one of the then associate professors during my undergraduate studies. Accessible to non math nerds, too, IMO, as Professor Felder illustrates things very geometrically.
(skip to the five minute mark if you are not interested in academic accolades)

** I am a subscriber to Veritasium’s YouTube channel but missed this, probably due to having binged too much on purely financials only focussed channels recently. :joy:

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That’s why options are not designed to last, maybe with the exception of DITM LEAPS.
Options favor those who have some ‘insight’ - short to mid term, before everyone else is having the ‘same’ insight and thus pumping IV reducing the chances of successful profit landing.
There is a lot to options. But this video is a good start.

Your link :slight_smile: - always eager to learn more :slight_smile:

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Nice video, I was hoping they would have told how to make 66% per year though :smiley:


You’re not the only one who would like to know :grinning: .
Recent podcast about jim simons & renaissance technologies, interesting listen IMO Renaissance Technologies: The Complete History and Strategy

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This brought back bad memories of undergraduate mathematics when an entire semester was spent on Martingale Theory and proving the Black-Scholes formula.


Here is a pretty good interview with James Simons, and there is much more in the net, longer and more detailed.

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What’s telling is that in one video he’s said that they follow the algorithm’s predictions no matter how irrational they seem, suggesting they themselves don’t understand.

It’s also interesting to see Munger being asked about quants and being fairly dismissive, suggesting a bit of sour grapes. Buffett said “they are VERY smart”, to which Munger responded “yeah they got very rich”, then Buffett repeated saying they are very smart and Munger capitulating. Buffett being more measured he said they (Berkshire) don’t know how to make money trading stocks, and wouldn’t let anyone do it for them.

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Jim Simons just died :frowning: