# Use of Distribution in Options analysis



## mswiggs (21 February 2006)

Hi all,

I am just wondering if many traders use statistical distribution of the share price when deciding weather or not to put on a trade. And the overall effectiveness of using this type of analysis.

Also what type of distribution do you use? Eg the most common seems to be normal distribution but I am wondering if there are other types, eg Logarithmic, which seems more effective. 

Cheers Mick


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## wayneL (21 February 2006)

mswiggs said:
			
		

> Hi all,
> 
> I am just wondering if many traders use statistical distribution of the share price when deciding weather or not to put on a trade. And the overall effectiveness of using this type of analysis.
> 
> ...




1/ Lognormal because of 0

2/ Be aware of kurtosis/fat tails, especially if trend following.


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## Nick Radge (21 February 2006)

Also review the volatility as well. For many years I sold strangles on the SPI futures based on MAE analysis. I stopped in 2001 because the volatility had dropped off so much it just wasn't worth the risk. You used to be able to get 28pts per month, but when I stopped it had dropped to about 12pts and as Wayne says, those fat tails will catch you one day


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## mswiggs (21 February 2006)

Thanks for your replies,

Nick whats MAE analysis? :$ 

Mick


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## wayneL (21 February 2006)

mswiggs said:
			
		

> Thanks for your replies,
> 
> Nick whats MAE analysis? :$
> 
> Mick




Mick I can answer that as Nick's not online...

Maximum Adverse Excursion i.e. what's in those fat tails


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