An analyst stated that Wall Street often misprices option premiums for publicly traded securities. The Black-Scholes model, a standard reference, assumes stock movements are random with constant volatility and no memory, calculating call option prices as the expected discounted payoff above the strike price at expiration.
The model offers a clean template but lacks contextual backing, the analyst noted. Three key points were raised: stock movements are not random, volatility is not constant, and stocks do have memory, with past events influencing future outcomes.
The last point relates to the Markov property, where a system's future state depends solely on its current state. Under Black-Scholes, no behavioral states are considered, which doesn't make the pricing mechanism wrong but can lead to suboptimal projections, as risk is defined proportionally to distance from spot.
Using a basketball analogy, the analyst explained that in real conditions, a defended layup might be harder than an open three-pointer, illustrating the Markov property's second-order analysis based on context rather than model presumption.
Palo Alto Networks (PANW) had a spot price of $187.68. The Black-Scholes-based Expected Move calculator projected a range of $171.31 to $204.01 for options expiring Feb. 20, a symmetrical spread of 8.71%. However, PANW showed bias, with only three up weeks in the last ten, creating a downward slope and pessimistic sentiment heading into the weekend.
Historical data under 3-7-D conditions suggests PANW tends to swing higher. Over the next five weeks, probability density may peak between $196 and $200. The 195/200 bull call spread expiring Feb. 20 could yield over 156% if PANW rises through $200 at expiration.
NetEase (NTES), a China-based internet technology firm, had a spot price of $137.98. The Expected Move calculator projected a dispersion between $127.52 and $148.43 for the Feb. 20 options chain, based on implied volatility and days to expiration without market context.
NTES also printed only three up weeks in the last ten, leading to a downward slope. While this 3-7-D sequence implies bearish control, past data shows NTES tends to resolve upward. Applying the Markov property, probability density over the next five weeks may peak around $155, making the 145/155 bull call spread expiring Feb. 20 appealing with a potential 212.5% payout.
Dick's Sporting Goods (DKS) had a spot price of $215.32. The Expected Move calculator anticipated a dispersion of $198.07 to $232.57 by the Feb. 20 options chain, providing a clean template without second-order context.
DKS is flashing a 3-7-D sequence with negative implications, but under this context, it tends to resolve higher. Using past analogs, probability density would likely peak at $230. The 220/230 bull call spread expiring Feb. 20 could yield 150% if DKS rises through the second-leg strike at expiration.