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Peter Namtvedt wrote:
> AJ:
>
> Who can determine the difference between perceived and real value? The
> assignment of value to anything by anything is by how the perceive it.
It's the perceived value that counts, as you say.
> I also have a deeper question: what is it that motivates the two
> (theoretical)
> parties to make a trade ($2 for an IBM whatever July xx option) at a
> particular price. One party could say I will not part with the August
> for less than $3, and the other party will say I might pay $1 for the June.
> What real or perceived value are we talking about, and what goes through
> their minds at the moment of decision to trade?
Obviously, no trade would be possible without both parties agreeing on price.
The seller would be perceiving a negative value at $2, while the buyer would
perceive (believe) the opposite. Now, it might be that the seller believes the
true (perceived) value for the option to be $1, and the buyer $3. Therefore, the
buyer would be willing to pay $1 plus whatever he is allowing for risk and
reasonable profit, while the seller would be willing to part with it at a
sufficient premium to what he believes to be its true ultimate worth.
Regards,
A.J.
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