{"id":4772,"date":"2024-04-13T11:48:32","date_gmt":"2024-04-13T11:48:32","guid":{"rendered":"https:\/\/prosperity.newai.com.au\/?p=4772"},"modified":"2025-04-13T12:45:03","modified_gmt":"2025-04-13T12:45:03","slug":"black-scholes-on-islands-pricing-coconut-options-in-round-4","status":"publish","type":"post","link":"https:\/\/prosperity.newai.com.au\/index.php\/2024\/04\/13\/black-scholes-on-islands-pricing-coconut-options-in-round-4\/","title":{"rendered":"Black-Scholes on Islands: Pricing Coconut Options in Round 4"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"4772\" class=\"elementor elementor-4772\">\n\t\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-fa182de elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"fa182de\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-554880b\" data-id=\"554880b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-66be639 elementor-widget elementor-widget-text-editor\" data-id=\"66be639\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.6.7 - 03-07-2022 *\/\n.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#818a91;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#818a91;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block}<\/style>\t\t\t\t<p><b>Round 3 Performance<\/b><br \/>Final Ranking: #27 (improved from previous round)<\/p><p>Key Results:<\/p><p>1. Manual Trading:<br \/>\u2981 Selected positions: J26 (58k profit) and G30 (60k profit)<br \/>\u2981 Inviting others to share their selections\/profits in comments for comparison<\/p><p>2. Algo Trading:<br \/>\u2981 Market making products: 30k profit<br \/>\u2981 Orchids: Disappointing 5k profit (vs 460k in Round 2)<br \/>\u2981 Basket trading: 60k profit<\/p><p>Critical Issue Identified:<br \/>\u2981 Orchids&#8217; previous high profits were caused by IMC&#8217;s problematic bot behavior<br \/>\u2981 Bots were overly aggressive in taking bids\/asks, artificially inflating arbitrage profits<br \/>\u2981 Issue wasn&#8217;t fixed in Round 2 test data, but silently corrected for Round 3 live competition<br \/>\u2981 Significant time wasted optimizing for flawed conditions<\/p><p><b>Round 4 Strategy: Coconuts &amp; Coconut Coupons<\/b><\/p><p>Market Analysis:<br \/>\u2981 Both products show very tight bid-ask spreads (1-2 range)<br \/>\u2981 Conclusion: Market making not viable \u2192 Focus on taking positions<\/p><p>Pricing Framework:<br \/>\u2981 Using Black-Scholes model for coconut coupon pricing<br \/>\u2981 Two key applications:<br \/>(1) Calculate theoretical coupon price using coconut price and implied volatility<br \/>(2) Derive implied volatility from market prices using gradient descent<br \/>(See Figure for implementation code)<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-d4e5a10 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"d4e5a10\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-e80667d\" data-id=\"e80667d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-8a47d36 elementor-widget elementor-widget-image\" data-id=\"8a47d36\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.6.7 - 03-07-2022 *\/\n.elementor-widget-image{text-align:center}.elementor-widget-image a{display:inline-block}.elementor-widget-image a img[src$=\".svg\"]{width:48px}.elementor-widget-image img{vertical-align:middle;display:inline-block}<\/style>\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"804\" height=\"540\" src=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/23-2.jpg\" class=\"attachment-full size-full\" alt=\"\" srcset=\"https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/23-2.jpg 804w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/23-2-300x201.jpg 300w, https:\/\/prosperity.newai.com.au\/wp-content\/uploads\/2025\/04\/23-2-768x516.jpg 768w\" sizes=\"auto, (max-width: 804px) 100vw, 804px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-557cdd4 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"557cdd4\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-8218357\" data-id=\"8218357\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-32af3bc elementor-widget elementor-widget-text-editor\" data-id=\"32af3bc\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>Trading Strategy:<\/p>\n<p>1. Fit implied volatility from historical data<\/p>\n<p>2. When coupon price deviates significantly from fair value:<\/p>\n<p>\u2981 Take opposite position in coupons<br>\u2981 Implement delta hedge with coconuts<br>\u2981 Hedge ratio: -delta \u00d7 position size<\/p>\n<p>3. Example trade:<\/p>\n<p>\u2981 Fair value = 670<br>\u2981 Delta = 0.5<br>\u2981 Market coupon price: 662\/663<br>\u2981 Action: Buy 10 coupons at 663 + Sell 5 coconuts<\/p>\n<p>Current Performance:<\/p>\n<p>\u2981 Backtest shows ~30k profit<br>\u2981 Additional parameter optimization possible<\/p>\n<p>Manual Trading Preview:<\/p>\n<p>\u2981 Game theory version of previous goldfish game<br>\u2981 Detailed analysis to follow in next update<\/p>\n<p><b>Final Notes<\/b><\/p>\n<p>(1) Despite Orchids disappointment, overall ranking improved<\/p>\n<p>(2) Coconut strategy shows promise but requires refinement<\/p>\n<p>(3) Encouraging community data sharing for manual trades<\/p>\n<p>(4) Will continue to monitor for any undisclosed rule changes<\/p>\n<p>Safe trading to all competitors!<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Round 3 PerformanceFinal Ranking: #27 (improved from previous round) Key Results: 1. Manual Trading:\u2981 Selected positions: J26 (58k profit) and G30 (60k profit)\u2981 Inviting others to share their selections\/profits in comments for comparison 2. Algo Trading:\u2981 Market making products: 30k profit\u2981 Orchids: Disappointing 5k profit (vs 460k in Round 2)\u2981 Basket trading: 60k profit Critical [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":4537,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[38],"tags":[],"class_list":["post-4772","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-2024r4"],"acf":[],"_links":{"self":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4772","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/comments?post=4772"}],"version-history":[{"count":16,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4772\/revisions"}],"predecessor-version":[{"id":4789,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/posts\/4772\/revisions\/4789"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/media\/4537"}],"wp:attachment":[{"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/media?parent=4772"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/categories?post=4772"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prosperity.newai.com.au\/index.php\/wp-json\/wp\/v2\/tags?post=4772"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}