Ask HN: Is the options pricing model broken for deep GME OTM puts?

Volatility is driving all options up, puts or calls. I have a deep in the money put (not as deep as those, it's at $25) that is up over 100% since last week. Too bad I didn't buy a call, too. I figured it was going to come back down quickly. Maybe in March.

Issuing new shares would let them raise capital, but then they have to do something with that capital. I don’t think they have much of a future so unless they have a CEO can both run GameStop and build something new on the side, he wouldn’t be helping anyone. Assuming the market feels the same way, the share price would fall a lot before the issue. Or he’d be taking money from WSB and wasting it on some doomed revitalisation.

Innovating while running a mature business is one of the most difficult things for companies and few succeed. Even Google mostly buy innovation rather than trying to do internally.

Models all use the volatility to guesstimate outcomes. More volatility means more value in an option. Look at it this way: if a stock is at 10$ and the vol is +/-1$ A day, you only need 5 down days for a 5$ option to be in the money. If the same stock shoots to 50$ over 2days, the vol is now +/-20$ a day (because it shot up at that rate). So you only need 2.5 down days and that 5$ put is in the money.

That’s effectively how the model “sees” GME.

I’d tend to agree that it doesn’t make much sense for the price to have changed given these circumstances. I think that’s an artefact of the model. To be fair, the model relies on volatility being relatively constant AND it being bidirectional (prices go up or down randomly). You can’t really use a model like this to price options on an underlying like GME.

This is where the skill comes in: you don’t just need to obey the model, you need to look at the market, decide it won’t stay this volatile, adjust you vol figure down and trade based on the new model price it gives you and hope the market comes to you before you go bankrupt!

But that takes insight and you have to actively manage the risk that creates if you’re working at volume.

If you’re willing to take that risk and you think GME will quite down, you can short some puts. That would limit your downside to volume*strike price. But you have to accept your eating some risk.

Personally I’d say GME options are not meaningfully modelable right now and you can make good money in disfunctional markets. I keep some cash for this sort of speculation myself. But I only gamble what I can afford to lose and I don’t kid myself I’m Investing.

I’m cash poor right now (covid and no job) otherwise I’d be tempted to try this tbh.

To be clear, I’m not an expert and this isn’t financial advice. I just did software support for a convertible bond desk for a year so I learned enough to hurt myself!