16 lines
1.2 KiB
Plaintext
16 lines
1.2 KiB
Plaintext
Chapter 38: The Distribution of Stock Prices 811
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in the dark as to the likelihood of profitable outcomes for his strategy. Overall, in a
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diversified set of positions, the option strategist should use the fat tail distribution in
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a Monte Carlo simulation to estimate probabilities. However, if that is not available,
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he can use the normal or lognormal distribution with the proviso that he understands
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it is not "gospel." He should require ve:ry stringent criteria on any strategies that are
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antivolatility strategies, such as naked option writing of stock options, for there is a
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greater than normal chance of a large move by the underlying, especially if the
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underlying is stock.
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The sophisticated trader may want to view his probabilities in the light of more
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than one proposed distribution of prices. Of course, this type of analysis ( using sev
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eral distributions) puts the onus on the investor to choose the distribution that he
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wants to use in order to analyze his investment. However, such an approach should
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be extremely illustrative in that he can compare returns from different strategies and
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have a reasonable expectation as to which ones might perform the best under differ
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ent market conditions. |