Spreading’s robustness to volatility estimates made it viable for floor traders

Evidence

The “Introduction” to his options service that Black circulated gave simple instructions how to identify and to exploit opportunities for spreading (Black 1975b, p. 7). Spreading avoided both the difficulties of the more basic BlackScholes arbitrage strategy described above. It was “less sensitive to the estimated volatility of the stock” because “an increase in the volatility estimate will increase the value of all the options on a stock” (Black 1975a, p. 40), and it did not require purchases or sales of stock: it required only purchases and sales of options. — Donald MacKenzie, An Engine, Not a Camera, 734

Categorization

• XREF: Key to the performativity argument: spreading made Black’s model more robust precisely because it used the model’s relative predictions, not absolute ones. — connects to: Academic backtesting used advantages unavailable to actual floor traders, raising the adoption question — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 711; Infinite-variance estimators resist both calm and crisis, stabilizing margin requirements — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 940; Spreading lets average traders exploit option mispricing without stock positions — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 733 (+1 more)

Broader Connections

• Infinite-variance estimators resist both calm and crisis, stabilizing margin requirements #complicates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 940
• Spreading lets average traders exploit option mispricing without stock positions #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 733