In my earlier post on this subject, I had written that I might possibly put the contents of the letter I wrote on this blog. On second thoughts, however, I decided that those contents were mostly a private matter between me and the person the letter was intended for, and so it won’t be a good idea to post it on the blog. However, there are a few lines which I came up with which I think I’m fairly proud of. So as to not to disappoint you readers completely, here is one of those:
There is no point in my narrating the Ramayana for a year and then you saying that you thought I was narrating the Mahabharata.
To compensate for not putting the full letter as promised, I am putting here Rahul RG’s excellent commentary on the issue. RG was 3 years my junior at NPS Indiranagar, IIT Madras and IIM Bangalore. It’s in the form of a GTalk conversation. It’s slightly longish so I’ll put it under the fold.
me: if you think the scope of finance and derivatives is getting limited, then you should read my latest blog post
12:04 AM Rahul: yes, just saw that
was thinking about it.
12:06 AM what was the underlying, again?
me: permission to hit on a girl
12:07 AM i asked her if she’s ok
Rahul: so you are modelling it as an option on an option, yes?
me: yes
Rahul: thats what i was thinking.
me: hehehe
strong
Rahul: what i was thinking is that the underlying is like a binary payoff
12:08 AM me: yes
and i’m hedging against a NO
Rahul: which means if she is close but not entirely surely
then the delta blows up
me: 🙂
too much da 🙂
but right now i’m shagging in the hedge
12:09 AM and also in gamma – i’m thrilled at the thought of coming up with this whole thing
delta included
Rahul: yes, i saw that 😛
it makes sense because if the girl is really out of your league then the option prices to zero because you really dont lose anything by trying
12:10 AM me: she isn’t exaclty “out of my league” but it’s long distance etc.
and so it’s hard to blade
it’s hard to make a positive impact for me going forward; so all i can do is to bank on the impact i made when i first met her
Rahul: ah okay
12:11 AM me: like say if i try chatting with her; i’ll be so nervous i’m sure to mess up; and obly i’ll need to be on guard and all that and it’ll hardly be enjoyable
so cost benefit analysis clearly points to long shot
12:12 AM Rahul: yes
me: cupid will commit suicide if he comes to know people are doing this kind of detailed analysis wrt louvvu; gamma delta vega hedge and all that
Rahul: haha, yes
but that was fun
Rahul: what of the effect of this transaction on future options?
12:14 AM me: ah interesting
i’ve assumed they’ll be uncorrelated
Rahul: yes
me: that future options won’t be correlated with this one;
Rahul: this is like black scholes with and without the vol smile
me: how da?
12:15 AM Rahul: because the market in the future is going to price in the fact that you are doing this.
women are going to talk, effectively.
12:16 AM and the effect of your mail may not be so potent in future cases.
which is the price you pay for this option
12:17 AM me: ah fair
strong
hey can i blog this conversation sometime? in the next couple of days?
your fundaes are too strong
Rahul: okay
me: peace
anyways i’ll crash now
office are there tomorrow
12:18 AM Rahul: oh yes, goodnight
me: bye
Rahul: bbye
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Wow – interesting application of derivatives!
BTW, excuse my ignorance (I have been out of India for too long, and besides I’m much older than you): but your post implies that “blade” (putting b on a woman) is synonymous with “hitting” on her? Does “B” have some of the negative connotations that H does? Are there any subtle differences?
2nd Question: The “Ah, interesting” suggests that you had not taken the future into account when you sought to “buy” the 1st option – correct? Also, when you & Rahul discuss this point – exactly what is the underlying? Same woman or other women (in the future)?
Also, strikes me that this is not just an option on an option on a binary payoff. More like a layer of N options. Every future opportunity you would have to chat with her in the future (N > 2) – you take it or don’t, and pay the time and care each time in having to saying the right things, and in “carrying” it one further step.
So your the intial “permission requested to blade” has even lower value, and higher curvature etc. (I’ll defer to you to tell me more about the Greeks).
Final (most important – to me) question: what precisely is the value of the underlying – what’s the stock price at any time and how do you “measure” or construct it?