Tag Archives: market price

If you would open up any newspaper or turn on any television you’ll see that our country is in a very serious financial crisis. Our real-estate market has collapsed, our banks are worthless, and most importantly our people are broke. The government has tried many bailout solutions and none of them seem to be working and that is because they are not going back to where the problem began.
The problem started with our banks not being able to do simple math. Yes, adding, subtracting, multiplying, and dividing. These examples are four ways to solve problems, and in our countries case no one could do them correctly. Many people talk about the sub-prime lending crisis as one of the major factors that lead the country into the recession we’re in, this is true, but it should include all Americans. Every bank was lending out to customers they knew couldn’t pay back these loans on time, nor at the interest rate they were charging, but they did it anyways. They were giving out million dollar loans to families who made only $40,000 a year, this doesn’t add up to well does it. So simple math that they learned in grade school wasn’t being calculated correctly in their heads and now half-million homes have been seized.
Other math that is used on Wall Street is when trading options. I have worked in an option pit before at the Chicago Board of Trade so I have experienced this type of math first hand. First of, “An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date”(http://www.investopedia.com/university/options/). There are many types of options trading, but trading volatility requires much math. Volatility is the measure of how fast and how much prices are likely to change in a given market. When trading volatility, traders use the concept called “standard deviation”, which simply means how far a measure moves from its average, and in this case how far a stock price moves from its average price. The variation on that number is known as “implied volatility”, which uses well-needed factors that are given to you such as the strike price, market price, expiration date, and the interest rate. For example, if a trader is trading Bank of America at $5.00 a share, the question is, will it go up to $6.00 by the end of the day or down to $4.00? These are big price swings, which will mean that there is high volatility in the market, which is where math concepts like “standard deviation” needs to be understood to its highest degree.
The final mathematical term used on Wall Street that I will discuss is hedging. Hedging is another important tool used in options trading because it takes off risk. Essentially it is another trade that bets against the initial one and quick mathematical skills are needed to make the best possible hedge. Once completing an options trade, you may be long or short deltas that need to be hedged. The trader does this by buying or selling futures, and in order to make the best possible hedge you need to first calculate how many futures to buy or sell and then at what price. This complicated process needs to be done as quickly as possible because the longer the trader waits to buy or sell, the worse his futures price is, which means the more money his misses out on.
The stock market is full of many different ideas, equations, theories, and solutions, but the only way to know it fully is to experience it. Math plays a major role in the way the market moves, but as we see right now it may take something more to get out of the hole were in.