One of the many interesting things Javelin points out is how you may get a positive EV from someone buying an option when that counter-party is also getting a positive EV.


Meaning, you are a seller and he is a buyer at the same price, and yet you both make money!?


He makes money because, somehow, the combined portfolio of his equities and his bond options becomes more valuable. You make money because, well, you make money - he gives you a piece of the action for being there.


But it is important to notice that a guy who writes bond straddles for a living might not be a natural counter-party, but rather a middleman. Meaning, he cannot hold them until expiration, and make money in the long run, he has to find a natural counter-party. Why? For one thing, he may have the same equity exposure - and the same volatility averseness - as the guy buying the straddle.


In other words, if you are the equity guy buying the long bond straddle, you have to ask yourself why is this option under-priced? Everyone owns stocks or something! What kind of freak, be it a collection agent, or someone in a high tax bracket, would consider this price expensive?


Okay, I ran a little thin there...


Other interesting things to recall are 1) the impact of interest rates on the pricing of things which create positive and negative cashflows at different points along the time axis, and 2) the pricing of volatility as a cost, whereby a 50/50 chance of .50 or $1.50 is worth less than $1.00.


leroy