43 lines
3.2 KiB
Plaintext
43 lines
3.2 KiB
Plaintext
546
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A Complete Guide to the Futures mArket
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5. The probability distributions in Figure 35.23 represent sample hypothetical illustrations
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of personal price expectations. The indicated optimal strategy in any given situation will
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depend upon the specific shape of the expected price distribution, an input that will differ from
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trader to trader.
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The general nature of the price expectations implied by each of the distributions in Figure 35.23
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can be summarized as follows:
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Expected Probability Distribution 1. Higher prices and low volatility. This interpretation follows from
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the fact that there is a greater probability of higher prices and that the probabilities are heavily
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weighted toward intervals close to the current price level.
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Expected Probability Distribution 2. Higher prices and high volatility. This distribution reflects the
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same 60/40 probability bias toward higher prices as was the case for
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distribution 1, but the
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assumed probability of a substantially higher or lower price is much greater.
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Expected Probability Distribution 3. lower prices and low volatility. This distribution is the bearish
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counterpart of distribution 1.
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Expected Probability Distribution 4. lower prices and high volatility. This distribution is the bearish
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counterpart of distribution 2.
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Expected Probability Distribution 5. Neutral price assumptions and low volatility. This distribution is
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symmetrical in terms of higher and lower prices, and probability levels are heavily weighted
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toward prices near the current level.
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Expected Probability Distribution 6. Neutral price assumptions and high volatility. This distribution is
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also symmetrical in terms of high and low prices, but substantially higher and lower prices have
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a much greater probability of occurrence than in
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distribution 5.
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Figure 35.24 combines expected Probability distribution 1 with three alternative bullish strat-
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egies. (Since it is assumed that there is a greater probability of higher prices, there is no need to
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consider bearish or neutral trading strategies.) Insofar as the assumed probability distribution is
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very heavily weighted toward prices near the current level, the short put position appears to offer
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the best strategy. Figure 35.25 combines the same three alternative bullish strategies with the bull -
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ish/volatile price scenario suggested by
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expected Probability distribution 2. In this case, the long
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call position appears to be the optimal strategy, since it is by far the best performer for large price
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advances and declines—price outcomes that account for a significant portion of the overall prob -
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ability distribution.
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In analogous fashion, Figure 35.26 suggests the preferability of the short call position given
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the bearish/nonvolatile price scenario assumption, while Figure 35.27 suggests that the long put
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position is the optimal strategy given the bearish/volatile price scenario. Finally, two alternative
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neutral strategies are compared in Figures 35.28 and 35.29 for two neutral price distributions
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that differ in terms of assumed volatility. The short straddle appears to offer the better strategy in
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the low volatility distribution assumption, while the reverse conclusion is suggested in the volatile
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price case. |