[PairTheBoard]

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I'm not sure how serious you are, but: do you understand the strategy I outline? you don't need to have black scholes and differential equations to get it. if all you're getting out of it is a "smell" I would suggest, if I may be so bold, that you work harder on the analyticcs. get a pen and paper and work through several scenarios of stock price movement and trades.

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I believe I understand the strategy. I've studied a rigorous proof of it and sat in lecture where the proof was given. As I understand it, the hedging strategy is done by the seller of the option to insure he doesn't lose a ton of money on it. If he's sold a call and the stock rises he basically takes a gradually increasing position in the stock to offset potential loses on the call he's sold. From the seller's point of view he doesn't care if it goes up as long as it doesn't go up too much - in which case he must hedge and protect, but potentially lose his profit on the sale of the call in doing so. He would much rather the stock goes down because he then automatically keeps the profit on the sale of the call. The Sales Price for the option is dictated by BS to be such as to probablistically offset the costs involved in hedging against a rising stock price. It's a "fair" price because the buyer of the call has the same EV as the seller of the call. That's entirely different from saying that either the buyer of the call or the seller of the call doesn't care whether the stock goes up or down. That smells fishy because it's not true. While the EV of the seller and buyer are equal their results are different depending on the size and direction of the stock price movement.

The reason BS was such a breakthrough result is that in computing this "fair" price for the option, which gives both buyer and seller equal EV, it was able to take the Stock "Trend" - assuming there is such a thing - out of the final calculation. The final calculation of the "fair" option price according to BS does not depend on the "Trend" except in how the Trend effects Volatility. This was an astonishing result by BS and had a huge freeing up effect on the options market. The BS mathematics has undergone tremendous scrutiny so it's almost certainly correct. However I still can't believe it.

PairTheBoard