36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
Chapter 38: The Distribution of Stock Prices 195
|
||
Figure 38-3 perhaps shows even more starkly how the bull market has affected
|
||
things over the last six-plus years. There are over 1,600 data points for IBM (i.e., daily
|
||
readings) in Figure 38-3, yet the whole distribution is skewed to the right. It appar
|
||
ently was able to move up quite easily throughout this time period. In fact, the worst
|
||
move that occurred was one move of -2.5 standard deviations, while there were
|
||
about ten moves of +4.0 standard deviations or more.
|
||
For a longer-term look at how IBM behaves, consider the longer-term distribu
|
||
tion of IBM prices, going back to March 1987, as shown in Figure 38-4.
|
||
From Figure 38-4, it's clear that this longer-term distribution conforms more
|
||
closely to the normal distribution in that it has a sort of symmetrical look, as opposed
|
||
to Figure 38-3, which is clearly biased to the right (upside).
|
||
These two graphs have implications for the big picture study shown in Figure
|
||
38-1. The database used for this study had data for most stocks only going back to
|
||
1993 (IBM is one of the exceptions); but if the broad study of all stocks were run
|
||
using data all the way back to 1987, it is certain that the "actual" price distribution
|
||
would be more evenly centered, as opposed to its justification to the right (upside).
|
||
That's because there would be more bearish periods in the longer study (1987, 1989,
|
||
and 1990 all had some rather nasty periods). Still, this doesn't detract from the basic
|
||
premise that stocks can move farther than the normal distribution would indicate.
|
||
WHAT THIS MEANS FOR OPTION TRADERS
|
||
The most obvious thing that an option trader can learn from these distributions and
|
||
studies is that buying options is probably a lot more feasible than conventional wisdom
|
||
would have you believe. The old thinking that selling an option is "best" because it
|
||
wastes away every day is false. In reality, when you have sold an option, you are exposed
|
||
to adverse price movements and adverse movements in implied volatility all during the
|
||
life of the option. The likelihood of those occurring is great, and they generally have
|
||
more influence on the price of the option in the short run than does time decay.
|
||
You might ask, "But doesn't all the volatility in 1999 and 2000 just distort the
|
||
figures, making the big moves more likely than they ever were, and possibly ever will
|
||
be again?" The answer to that is a resounding, "Nol" The reason is that the current
|
||
20-day historical volatility was used on each day of the study in order to determine
|
||
how many standard deviations each stock moved. So, in 1999 and 2000, that histori
|
||
cal volatility was a high number and it therefore means that the stock would have had
|
||
to move a very long way to move four standard deviations. In 1993, however, when
|
||
the market was in the doldrums, historical volatility was low, and so a much smaller |