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At 08:25 AM 6/7/98 -0300, A.J. Carisse wrote:
>Peter Namtvedt wrote:
>
>> What is it that motivates the two
>> 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.
>
>
>A.J.
Yep. They may be agreeing on the $2, but neither believes its future value
(perceived in the market) value is that. To the seller his option is worth
less than the other guy's cash. To the buyer his cash is worth less than the
other guy's option. If it wasn't for that difference in perception the trade
would never happen.
Now they also have information to support their valuations. They do not
discuss this or disclose.
If I am the buyer I might be thinking "I'll never see a profit buying it at
$3, I'm quite sure at $1, and somewhat likely at $2. This seller would be
smart to hold out for more than $2. If I can get it for $2, he's giving me
his
profits. I'm sure not going to tell him what I know that supports this."
The seller might be thinking "This dog is soon worth $1 allright, but you
are not getting it for that. At $2 there is still a profit in it that I'm
going to
keep. But I won't get it if I hold the option any longer. I'm sure not
going
to tell him what I know that supports this."
We're talking about perceived advantage (and of the opposite). Unbeknownst
to these traders, both may end up profiting. But at the time of their
trade each sees himself as getting an advantage and the other party getting
a disadvantage.
We as traders don't actually think about any individual opposite trader when
doing our business, but rather of the market as giving us a bargain or
offering a great price for what we are selling. But if we had thought about
real people, would it not be like I described? The scene that takes place
when a used car is sold is the essence of it. There is no objective price.
There are two people each of which has different views of the relative value
of a given amount of money versus the car, and each hoping the other party is
dumb enough to come closer to his own view.
petena9090@xxxxxxxxxxxxxx
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