Options Made Simple

Anyone who has traded, or read about trading, options will no doubt have heard of the Black-Scholes formula, and the BBC had an interesting article on the subject today.  One passage caught my eye, since it is refers to some similarities regarding how the betting exchanges have evolved. 

"There were many young traders who either had taken courses at MIT or Chicago in using the option pricing technology. On the other hand, there was a group of traders who had only intuition and previous experience. And in a very short period of time, the intuitive players were essentially eliminated by the more systematic players who had this pricing technology."

The betting exchanges levelled the betting playing field. Anyone who thought that betting back in the 1970s and 80s could be a steady source of additional income should have realised fairly quickly that with the 10% plus over-rounds, betting tax, and bookmakers who closed your account after making some profits, the average Joe was never going to be able to make a profit, and in my case, I dropped it for many years, and would have dropped it forever were it not for the advent of betting exchanges. 

After Cassini, it was the spreadsheet that said 'back', 'lay' or 'stay away'

When I stumbled upon Betfair, it was immediately obvious that with a close to zero % over-round, no tax, no restriction (currently) on betting, the ability to trade and just a (at the time) small commission to pay, this was something that, with a disciplined approach, could be a fun challenge, as well as generating a little extra cash. I suspect that I was / am not alone. While I hadn't taken a course at MIT or Chicago, I had taken a course in 'A' Level Pure Mathematics With Statistics, and passed it, and knew how to use a computer, and no longer was betting an unwinnable battle against bookmakers, but a very winnable probability estimating competition against other individuals. 

"It might have taken us a year, a year and a half to be able to solve and get the simple Black-Scholes formula," says Scholes. "But we had the actual underlying dynamics way before."

There's that word 'simple' again. Just yesterday, it was used to describe my draw selection process, and there it is again being used for the Black-Scholes formula. I suppose it's quite flattering really. It actually took me about a year and eight months to establish a profitable method - I'd say that it's because I'm a little slow, but then unlike Mr. Black, I didn't have Paul Scholes to collaborate with, and share the workload. Shame really. The Cassini formula doesn't sound so catchy as the Cassini-Balotelli formula, but if Mario had been involved, it would probably still be a (fire)work in progress. 

Meanwhile, I patiently await my Nobel Prize for Economics. The cash will come in handy, and at least I won't have to share it with anyone. Oh wait, Mrs. Cassini is saying shouting something about a new carpet. Always something.