Every time you buy or sell stock to rebalance your hedge, you pay a little toll. The bid-offer spread. The commission. The market impact. These are transaction costs, and they are the silent killer of options hedging strategies.
Try selling your house by tomorrow. Not in a month, not after listing it and staging it and waiting for offers. Tomorrow. For cash.
Black-Scholes says you should hedge continuously. Rebalance your portfolio every instant, forever, and all risk disappears like magic. Beautiful theory. Completely impossible in practice.
Chapter 6 is where everything gets real. Brad and his team stop talking about the problem and start building the solution. They quit their jobs, raise money, hire puzzle solvers, and design a stock exchange from scratch. And the centerpiece of the whole thing is a coil of fiber optic cable stuffed inside a box the size of a shoe.
We’ve spent the last five chapters talking about how biased we are. Now it’s time for the “how-to” part. How do we actually fix these mental glitches?
Stocks make more money than bonds. Everyone knows that. But here’s the thing. They make way more money than bonds. And when economists tried to explain why the gap is so big, they couldn’t. Not with their standard models. Not even close.
What if I told you that the day of the week affects your stock returns? Or that one specific month is consistently better than the other eleven? Sounds like astrology for finance people, right?
Before we tear Black-Scholes apart, Wilmott wants to make something clear. This model is a triumph. It changed finance forever. Two of its three creators won the Nobel Prize. Everyone in derivatives uses it, from salesmen to traders to quants. Option prices are often quoted not in dollars but in volatility terms, with the understanding that you plug that number into Black-Scholes to get the price.
We’ve reached the end of our retelling of Cyril Demaria’s “Introduction to Private Equity, Debt and Real Assets.” It’s been quite a journey—from Christopher Columbus to multi-billion dollar mega-funds.
This chapter hit me personally. I’m from the former USSR myself. I know people exactly like Sergey Aleynikov. Brilliant programmers who left because the system wouldn’t let them be what they were meant to be. Reading this felt less like a book and more like a story someone told me over tea.