The growth and risk of options trading made pricing models indispensable

Evidence

As the options markets grew, and the SEC relaxed, options were traded on more stocks, some no longer “blue chip” corporations but high volatility newcomers. More expensive errors made pricing models seem indispensable: “I’ll stand in a pit with [options on] 16 stocks that each trade two [expiry] months and five strike prices and I’ll take anybody on: turn off the lights, I want to trade with no electronics. But when you get to multiple expirations, strike prices, higher volatility stocks … well, volatility changes by 10%, Arco goes from a 15 to a 13.5 [annualized percentage implied volatility], I can do that math in my head. [With a high volatility stock] 150 to 135 seems like it ought to be similar but … I’ve got too much money at risk if I’m wrong in my mental calculations” (Carusillo and Struve interview 1). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 125

Categorization

• XREF: This is the performativity argument in miniature for MacKenzie’s ‘An Engine, Not a Camera’: market complexity created the material need that pricing theory filled. — connects to: Spanning multiple options markets forced firms to adopt pricing models — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 121; Trading more volatile stocks made mental pricing calculations riskier and models indispensable — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 750; Options pricing theory grew despite options being a minor financial instrument — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 530 (+1 more)
• SHARE: This trader quote about mental math — volatility 15 to 13.5 vs 150 to 135 — is a perfect detail for someone working in options or market microstructure.

Related

• Trading more volatile stocks made mental pricing calculations riskier and models indispensable (similarity 0.94)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.84)
• Spanning multiple options markets forced firms to adopt pricing models (similarity 0.84)
• Options pricing theory grew despite options being a minor financial instrument (similarity 0.83)
• Option prices are routinely quoted in implied volatility, a purely theoretical construct (similarity 0.81)
• Implied volatility turned options of disparate stocks into one comparable metric. (similarity 0.81)
• Implied volatility concepts and calculation devices are constitutive of economic action (similarity 0.80)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.80)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.80)
• Market conditions moved toward the model’s assumptions partly because of the model itself (similarity 0.79)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.79)
• Implied volatility reduces diverse option prices to one number, marking Black-Scholes’ cultural imprint (similarity 0.79)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.78)
• A model with fewer free parameters is easier for practitioners to adopt. (similarity 0.78)
• Black-Scholes-Merton pricing fit observed options data only approximately at launch. (similarity 0.78)

Broader Connections

• Trading more volatile stocks made mental pricing calculations riskier and models indispensable #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 750