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Re: [real_options_discussion] Re: Can an option have a negative value?

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  • Ola Ellnestam
    If you want to learn more about rational decisions I can recommend the excellent book Thinking fast and slow .
    Message 1 of 30 , Feb 22, 2012
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      If you want to learn more about rational decisions I can recommend the
      excellent book 'Thinking fast and slow'.

      http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637

      Cheers,
      Ola

      On 2012-02-22 23:03, Chris wrote:
      >
      >
      > Eric
      >
      > I could not agree more. ( are you sure we've not met before. )
      >
      > It's amazing how few decisions are rational.
      >
      > Regards
      >
      > Chris
      > (Sent from my iphone.)
      >
      > On 22 Feb 2012, at 19:43, Eric Willeke <eric.willeke@...
      > <mailto:eric.willeke@...>> wrote:
      >
      >> Financial options are frequently isolated from the individual and
      >> focused on the good or entity being traded on.
      >>
      >> Insurance maths may have some perspectives on accounting for
      >> irrationality...
      >>
      >> I'll also go back to this anecdote I recall a speaker presenting on
      >> "last train" vs "cab" vs "knowing where to buy a pressed shirt at 7am
      >> in the City". Irrationality abounded in that model, but it's still
      >> useful.
      >>
      >> Ending ramble now.
      >>
      >> E
      >>
      >> Please forgive if this came across short or poorly crafted, it was
      >> sent from my iPhone.
      >>
      >>
      >>
      >> On Feb 22, 2012, at 10:28 AM, Chris <chris.matts@...
      >> <mailto:chris.matts@...>> wrote:
      >>
      >>> Hi Eric
      >>>
      >>> Real Options assume rationality and as you point out we often do not
      >>> act rationally. The option to buy lottery tickets has value. However
      >>> if our decision process is irrational it may cause us to buy more
      >>> than we afford. It is the equivalent of saying the option to pour
      >>> water has a negative value of we chose to drown ourselves. The option
      >>> has a positive value but our decision process may cause us to make
      >>> irrational decisions.
      >>>
      >>> Have we met before?
      >>>
      >>> Regards
      >>>
      >>> Chris
      >>> (Sent from my iphone.)
      >>>
      >>> On 22 Feb 2012, at 13:28, Eric Willeke <eric.willeke@...
      >>> <mailto:eric.willeke@...>> wrote:
      >>>
      >>>> I have to look at the negative behavior costs. If an individual has
      >>>> a gambling problem (context) the awareness of being able to purchase
      >>>> lottery tickets at his corner store seems like a negative option.
      >>>>
      >>>> Lots of situations where the stress of deciding if an option should
      >>>> be executed far exceeds far exceeds the value of exercising it.
      >>>>
      >>>> This class of option is probably best explored in "predictably
      >>>> irrational"
      >>>>
      >>>> E
      >>>>
      >>>> Please forgive if this came across short or poorly crafted, it was
      >>>> sent from my iPhone.
      >>>>
      >>>>
      >>>>
      >>>> On Feb 22, 2012, at 3:45 AM, Josephine Gemson
      >>>> <josephine4685@... <mailto:josephine4685@...>> wrote:
      >>>>
      >>>>>
      >>>>> Hello,
      >>>>> Personally I would think options should ideally not have a negative
      >>>>> value. The cost of getting the option is always going to involve a
      >>>>> negative amount, but there is a difference between cost and value.
      >>>>> It would depend on how value is defined I guess, even though the
      >>>>> option was allowed to expire after some transaction cost, it has
      >>>>> provided one with flexibility in decision making (and not losing out!).
      >>>>> Any thoughts on the above?
      >>>>> Regards,
      >>>>> Josephine
      >>>>> *From:* lszyrmer <lukasz.szyrmer@...
      >>>>> <mailto:lukasz.szyrmer@...>>
      >>>>> *To:* real_options_discussion@yahoogroups.com
      >>>>> <mailto:real_options_discussion@yahoogroups.com>
      >>>>> *Sent:* Friday, February 17, 2012 11:36 PM
      >>>>> *Subject:* [real_options_discussion] Re: Can an option have a
      >>>>> negative value?
      >>>>>
      >>>>> If you take into account transaction costs, an exchange traded
      >>>>> option will have a negative value. Buying and selling an option
      >>>>> creates an immediate, albeit small negative cost. If you are
      >>>>> dealing with a lot of options this can actually be a drag on
      >>>>> (investment) portfolio performance.
      >>>>>
      >>>>> --- In real_options_discussion@yahoogroups.com
      >>>>> <mailto:real_options_discussion%40yahoogroups.com>, "Chris"
      >>>>> <chrisjmatts1968@...> wrote:
      >>>>> >
      >>>>> > All
      >>>>> >
      >>>>> > Did we get to a conclusion on this?
      >>>>> >
      >>>>> > Can anyone provide an example where an option has a negative value?
      >>>>> >
      >>>>> > Regards
      >>>>> >
      >>>>> > Chris
      >>>>> >
      >>>>> > --- In real_options_discussion@yahoogroups.com
      >>>>> <mailto:real_options_discussion%40yahoogroups.com>, David Peterson
      >>>>> <david@> wrote:
      >>>>> > >
      >>>>> > > I don't get this. If the option is out of the money, the value
      >>>>> isn't zero,
      >>>>> > > but negative whatever the option cost to buy / maintain /
      >>>>> check. Why are we
      >>>>> > > ignoring the costs?
      >>>>> > >
      >>>>> > > David
      >>>>> > >
      >>>>> > >
      >>>>> > >
      >>>>> > > On 19 November 2010 14:23, Nick de Voil <nick@> wrote:
      >>>>> > >
      >>>>> > > >
      >>>>> > > >
      >>>>> > > > Surely if an option is out of the money, it won't be
      >>>>> exercised so its
      >>>>> > > > value is exactly 0. That asymmetric payoff is fundamental to
      >>>>> what an
      >>>>> > > > option is.
      >>>>> > > >
      >>>>> > > > I think the onus to provide an example is on the person who
      >>>>> suggested it!
      >>>>> > > >
      >>>>> > > > Nick
      >>>>> > > >
      >>>>> > > >
      >>>>> > > > On 19/11/2010 14:10, Chris wrote:
      >>>>> > > > > Dear All
      >>>>> > > > >
      >>>>> > > > > For the past few years I've believed that an option cannot
      >>>>> have a
      >>>>> > > > negative value.
      >>>>> > > > >
      >>>>> > > > > It has been suggested that it is possible for an option to
      >>>>> have a
      >>>>> > > > negative value.
      >>>>> > > > >
      >>>>> > > > > Can anyone think of an example?
      >>>>> > > > >
      >>>>> > > > > Thanks
      >>>>> > > > >
      >>>>> > > > > Chris
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > > > ------------------------------------
      >>>>> > > > >
      >>>>> > > > > Yahoo! Groups Links
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > > >
      >>>>> > > >
      >>>>> > > >
      >>>>> > > >
      >>>>> > >
      >>>>> >
      >>>>>
      >>>>>
      >>>>>
      >
      >
      >


      --
      ---------------------------------------------------------
      Ola Ellnestam
      Agical AB
      Västerlånggatan 79, 2 tr
      111 29 Stockholm, SWEDEN

      Mobile: +46-708-754000
      E-mail: ola.ellnestam@...
      Blog: http://ellnestam.wordpress.com
      Twitter: ellnestam
    • Chris
      Wow. I have had three independent recommendations for this book today. Maybe the universe is trying to tell me something. In addition, I m reading Buyology
      Message 2 of 30 , Feb 23, 2012
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        Wow. I have had three independent recommendations for this book today. 

        Maybe the universe is trying to tell me something.

        In addition, I'm reading Buyology which is also about the irrationality of our buying habits.

        Regards

        Chris
        (Sent from my iphone.) 

        On 23 Feb 2012, at 07:54, Ola Ellnestam <ola.ellnestam@...> wrote:

         

        If you want to learn more about rational decisions I can recommend the
        excellent book 'Thinking fast and slow'.

        http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637

        Cheers,
        Ola

        On 2012-02-22 23:03, Chris wrote:
        >
        >
        > Eric
        >
        > I could not agree more. ( are you sure we've not met before. )
        >
        > It's amazing how few decisions are rational.
        >
        > Regards
        >
        > Chris
        > (Sent from my iphone.)
        >
        > On 22 Feb 2012, at 19:43, Eric Willeke <eric.willeke@...
        > <mailto:eric.willeke@...>> wrote:
        >
        >> Financial options are frequently isolated from the individual and
        >> focused on the good or entity being traded on.
        >>
        >> Insurance maths may have some perspectives on accounting for
        >> irrationality...
        >>
        >> I'll also go back to this anecdote I recall a speaker presenting on
        >> "last train" vs "cab" vs "knowing where to buy a pressed shirt at 7am
        >> in the City". Irrationality abounded in that model, but it's still
        >> useful.
        >>
        >> Ending ramble now.
        >>
        >> E
        >>
        >> Please forgive if this came across short or poorly crafted, it was
        >> sent from my iPhone.
        >>
        >>
        >>
        >> On Feb 22, 2012, at 10:28 AM, Chris <chris.matts@...
        >> <mailto:chris.matts@...>> wrote:
        >>
        >>> Hi Eric
        >>>
        >>> Real Options assume rationality and as you point out we often do not
        >>> act rationally. The option to buy lottery tickets has value. However
        >>> if our decision process is irrational it may cause us to buy more
        >>> than we afford. It is the equivalent of saying the option to pour
        >>> water has a negative value of we chose to drown ourselves. The option
        >>> has a positive value but our decision process may cause us to make
        >>> irrational decisions.
        >>>
        >>> Have we met before?
        >>>
        >>> Regards
        >>>
        >>> Chris
        >>> (Sent from my iphone.)
        >>>
        >>> On 22 Feb 2012, at 13:28, Eric Willeke <eric.willeke@...
        >>> <mailto:eric.willeke@...>> wrote:
        >>>
        >>>> I have to look at the negative behavior costs. If an individual has
        >>>> a gambling problem (context) the awareness of being able to purchase
        >>>> lottery tickets at his corner store seems like a negative option.
        >>>>
        >>>> Lots of situations where the stress of deciding if an option should
        >>>> be executed far exceeds far exceeds the value of exercising it.
        >>>>
        >>>> This class of option is probably best explored in "predictably
        >>>> irrational"
        >>>>
        >>>> E
        >>>>
        >>>> Please forgive if this came across short or poorly crafted, it was
        >>>> sent from my iPhone.
        >>>>
        >>>>
        >>>>
        >>>> On Feb 22, 2012, at 3:45 AM, Josephine Gemson
        >>>> <josephine4685@... <mailto:josephine4685@...>> wrote:
        >>>>
        >>>>>
        >>>>> Hello,
        >>>>> Personally I would think options should ideally not have a negative
        >>>>> value. The cost of getting the option is always going to involve a
        >>>>> negative amount, but there is a difference between cost and value.
        >>>>> It would depend on how value is defined I guess, even though the
        >>>>> option was allowed to expire after some transaction cost, it has
        >>>>> provided one with flexibility in decision making (and not losing out!).
        >>>>> Any thoughts on the above?
        >>>>> Regards,
        >>>>> Josephine
        >>>>> *From:* lszyrmer <lukasz.szyrmer@...
        >>>>> <mailto:lukasz.szyrmer@...>>
        >>>>> *To:* real_options_discussion@yahoogroups.com
        >>>>> <mailto:real_options_discussion@yahoogroups.com>
        >>>>> *Sent:* Friday, February 17, 2012 11:36 PM
        >>>>> *Subject:* [real_options_discussion] Re: Can an option have a
        >>>>> negative value?
        >>>>>
        >>>>> If you take into account transaction costs, an exchange traded
        >>>>> option will have a negative value. Buying and selling an option
        >>>>> creates an immediate, albeit small negative cost. If you are
        >>>>> dealing with a lot of options this can actually be a drag on
        >>>>> (investment) portfolio performance.
        >>>>>
        >>>>> --- In real_options_discussion@yahoogroups.com
        >>>>> <mailto:real_options_discussion%40yahoogroups.com>, "Chris"
        >>>>> <chrisjmatts1968@...> wrote:
        >>>>> >
        >>>>> > All
        >>>>> >
        >>>>> > Did we get to a conclusion on this?
        >>>>> >
        >>>>> > Can anyone provide an example where an option has a negative value?
        >>>>> >
        >>>>> > Regards
        >>>>> >
        >>>>> > Chris
        >>>>> >
        >>>>> > --- In real_options_discussion@yahoogroups.com
        >>>>> <mailto:real_options_discussion%40yahoogroups.com>, David Peterson
        >>>>> <david@> wrote:
        >>>>> > >
        >>>>> > > I don't get this. If the option is out of the money, the value
        >>>>> isn't zero,
        >>>>> > > but negative whatever the option cost to buy / maintain /
        >>>>> check. Why are we
        >>>>> > > ignoring the costs?
        >>>>> > >
        >>>>> > > David
        >>>>> > >
        >>>>> > >
        >>>>> > >
        >>>>> > > On 19 November 2010 14:23, Nick de Voil <nick@> wrote:
        >>>>> > >
        >>>>> > > >
        >>>>> > > >
        >>>>> > > > Surely if an option is out of the money, it won't be
        >>>>> exercised so its
        >>>>> > > > value is exactly 0. That asymmetric payoff is fundamental to
        >>>>> what an
        >>>>> > > > option is.
        >>>>> > > >
        >>>>> > > > I think the onus to provide an example is on the person who
        >>>>> suggested it!
        >>>>> > > >
        >>>>> > > > Nick
        >>>>> > > >
        >>>>> > > >
        >>>>> > > > On 19/11/2010 14:10, Chris wrote:
        >>>>> > > > > Dear All
        >>>>> > > > >
        >>>>> > > > > For the past few years I've believed that an option cannot
        >>>>> have a
        >>>>> > > > negative value.
        >>>>> > > > >
        >>>>> > > > > It has been suggested that it is possible for an option to
        >>>>> have a
        >>>>> > > > negative value.
        >>>>> > > > >
        >>>>> > > > > Can anyone think of an example?
        >>>>> > > > >
        >>>>> > > > > Thanks
        >>>>> > > > >
        >>>>> > > > > Chris
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > > > ------------------------------------
        >>>>> > > > >
        >>>>> > > > > Yahoo! Groups Links
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > > >
        >>>>> > > >
        >>>>> > > >
        >>>>> > > >
        >>>>> > >
        >>>>> >
        >>>>>
        >>>>>
        >>>>>
        >
        >
        >

        --
        ---------------------------------------------------------
        Ola Ellnestam
        Agical AB
        Västerlånggatan 79, 2 tr
        111 29 Stockholm, SWEDEN

        Mobile: +46-708-754000
        E-mail: ola.ellnestam@...
        Blog: http://ellnestam.wordpress.com
        Twitter: ellnestam

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