I’m confused by this example. This seems exactly the kind of time where an averaged point estimate is the correct answer. Say there’s a 50% chance the company survives and is worth $100 and a 50% chance it doesn’t and is worth $0. In this case, I am happy to buy or sell the price at $50.
Doing research to figure out it’s actually an 80% chance of $100 means you can buy a bunch and make $30 in expected profit. This isn’t anything special though—if you can do research and form better beliefs than the market, you should make money. The different world models don’t seem relevant here to me?
Not sure if that’s what happened in that example, but you can bet that a price will rise above some threshold, or fall below some threshold, using options. You can even do both at the same time, essentially betting that the price won’t stay as it is now.
But whether you will make money that way depends on the price of options.
I’m confused by this example. This seems exactly the kind of time where an averaged point estimate is the correct answer. Say there’s a 50% chance the company survives and is worth $100 and a 50% chance it doesn’t and is worth $0. In this case, I am happy to buy or sell the price at $50.
Doing research to figure out it’s actually an 80% chance of $100 means you can buy a bunch and make $30 in expected profit. This isn’t anything special though—if you can do research and form better beliefs than the market, you should make money. The different world models don’t seem relevant here to me?
Not sure if that’s what happened in that example, but you can bet that a price will rise above some threshold, or fall below some threshold, using options. You can even do both at the same time, essentially betting that the price won’t stay as it is now.
But whether you will make money that way depends on the price of options.