I am wondering why smart experts never talk about market risk of the no arbitrage BS price. Why do buyers of the options never ask for example the questions like what is the chance to lost premium? , or what are the average loss and profit by using BS no arbitrage pricing? , or for example if a large number of market participants are not going to buy options to hedge stocks and opposite just take a risk to make money why experts are trying to convince them that BS is the right price for them and it is good idea to use BS pricing to calculate implied volatility? I think when experts and customers will start to understand how to answer for such questions our points for many pricing problems will be pretty much similar.No arbitrage is simply means that we can not make money on something that we buy and immediately sell. This is property of the pricing but not its definition. It is a definition in BS world because the world does not real as it makes the market risk of any price including BS invisible. If one interpret IRS as a portfolio of options and uses BS pricing then the market risk is automatically invisible. Of course the modern finance uses calibration for price adjustments but it does not discover market risk. Other interesting example illustrates invisibility of the market risk in modern pricing concept is a future interest rate contract like FRA. In pricing they makes to be equal the unknown random interest rate over future period [ T , T + H ] which should be interpreted as a random variable and market implied future rate that is known deterministic market estimate of the unknown random variable. For details one can look athttp://www.slideshare.net/list2do/fixed-rates-modeling

QuoteOriginally posted by: list1I am wondering why smart experts never talk about market risk of the no arbitrage BS price. Why do buyers of the options never ask for example the questions like what is the chance to lost premium? , or what are the average loss and profit by using BS no arbitrage pricing? , or for example if a large number of market participants are not going to buy options to hedge stocks and opposite just take a risk to make money why experts are trying to convince them that BS is the right price for them and it is good idea to use BS pricing to calculate implied volatility? I think when experts and customers will start to understand how to answer for such questions our points for many pricing problems will be pretty much similar.No arbitrage is simply means that we can not make money on something that we buy and immediately sell. This is property of the pricing but not its definition. It is a definition in BS world because the world does not real as it makes the market risk of any price including BS invisible. If one interpret IRS as a portfolio of options and uses BS pricing then the market risk is automatically invisible. Of course the modern finance uses calibration for price adjustments but it does not discover market risk. Other interesting example illustrates invisibility of the market risk in modern pricing concept is a future interest rate contract like FRA. In pricing they makes to be equal the unknown random interest rate over future period [ T , T + H ] which should be interpreted as a random variable and market implied future rate that is known deterministic market estimate of the unknown random variable. For details one can look athttp://www.slideshare.net/list2do/fixed-rates-modelingcouldn't tell you mate. but these are all good points.

Dave, I think if you begin to provide your clients info like a chance to lost premium, average loss and average profit then someone will also tell you about yours good points

QuoteOriginally posted by: list1Dave, I think if you begin to provide your clients info like a chance to lost premium, average loss and average profit then someone will also tell you about yours good pointsthe gift that keeps on giving. more good points.