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Cheap vs Expensive Options | Warren Buffett on Options | Fed Powell Presser

By Derek Moore

Show Summary:

Derek Moore and Jay Pestrichelli, CEO of ZEGA Financial, discussed the fallout in the markets during Jerome Powell’s press conference post Fed decision. Then, they talk about high yield spreads and current interest rates across relative fixed income like investment grade, high yield, and treasuries. Finally, they explore how options are priced and which options are considered expensive or cheap vs one another. It might surprise you to take a step back looking at the per day costs. How options are priced using various inputs like implied volatility, interest rates, and time value. How Warren Buffett and Charlie Munger at Berkshire Hathaway have used options. Charlie Munger says Black Scholes is useless to price longer term options. Finally, some recommendations.  

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Topics Include:

  • The Federal Reserve has no action, but rates move higher.
  • Rising long end of the yield curve
  • Does the bond market finally believe the fed?
  • Jerome Powell post press conference market selloff
  • When all the high yield is due to be refinanced in the debt maturity wall.
  • Looking at 0 DTE option with a half hour left compared to 3-day options.
  • Comparing 0 DTE options all the way out to 5year+ options prices
  • What is the per day cost of an option?
  • Comparing longer vs shorter-term options from a cheap vs expensive standpoint
  • How implied volatility currently is higher in much longer options.
  • What implied volatility says about 1 standard deviation expectations for price?
  • Cost of carry and interest rates in the pricing of options
  • Constructing hypothetical option trades holding treasuries with long term calls
  • Is Charlie Munger right that Black Scholes mispriced long term options?
  • ISDA agreement Big Short Brownville Capital talking about mispriced long-term options.
  • Warren Buffett talks about selling very long-term options to get paid to have an option

Mentioned in this Episode:

0DTE Options Analysis| Inflation Coming Back? | Strong US Dollar Impact 

Warren Buffett and Charlie Munger Berkshire Hathaway meeting discuss using and pricing options 

Implied Volatility Deep Dive | Real Interest Rate Yields | The Big Short | Tesla vs Nvidia 

GameStop Short Squeeze by the Reddit Wall Street Bets Traders Explained

The Big Short Movie and Credit Default Swaps Explained

Margin Call Movie and Understanding Value at Risk 

Recession Predictions Still Wrong? | Synthetic Options | Unemployment Anomalies | Oil Prices Breakout

0 DTE Options No Problem? | Jay Powell’s Wyoming Speech Points to More Interest Rate Hikes?

Jay Pestrichelli’s book Buy and Hedge 

Derek’s new book on public speaking Effortless Public Speaking 

Derek Moore’s book Broken Pie Chart