I should state that the article may not be so easy to digest because it has many long passages, so I advise you to take your time -plus a cup of coffee- before you start reading. But once you start reading, you get impressed with the style, and feel rewarded with the wisdom of the author.
Below can you find my short summary of the article.
- Our present theory of options, introduced by Black and Scholes in 1973, presents the risks associated with buying options and selling them as exactly the same, although the two activities involve very different levels of loss.
- The Black-Scholes “utility” had created an impression that value of options could be scientifically determined. This had made accounting of options possible, and use of options had exploded.
- However, Black-Scholes method assumes that markets are perfectly efficient, and price moves are normally distributed, neither of which are true in reality. We live in a financial world at which distributions have fatter tails, and we should take this into account in our usage of any methodology. Options are mispriced under the normal distribution assumption.
- In our world of fatter-tailed distributions, selling options is more risky than the model assumes –and consequently the price implies-, whereas buying options might involve some real value at the price that the Black-Scholes model reveals.