Use of Distribution in Options analysis

[mswiggs]

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

 

[wayneL]

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

1/ Lognormal because of 0

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

 

[Nick Radge]

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

 

[mswiggs]

Thanks for your replies,

Nick whats MAE analysis? :$

Mick

 

[wayneL]

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