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Onno,
The ODDS probability cone in MetaStock 6.5 as well as the Black Scholes
option pricing model are based upon the assumption that market returns
are log normally distributed, that is:
X=log(P[t]/P[t-1])
where P[t] is the current price and P[t-1] is the prior price (in
whatever
time units you are using (minutes, days, etc...). It is the value of X
that
is normally distributed.
Whether X is really normally distributed or not is open to debate. Some
(the
chaos folks) argue that X may actually follow a distribution with an
infinite
standard deviation (Who knows for sure?). The normal assumption was good
enough
for Black Scholes.
If you plot the ODDS probability cone in MetaStock 6.5 for the DOW or
S&P I
think that you will find that the cone is not very senstitive to the
number
of bars used to calculate it. That does not seem to be a very important
parameter.
I can't comment on Fishback's system since I have never studied it. I
have come
to the conclusion in general, however, that if someone had such a super
system
they'd be making their money trading it and not selling it.
Regards,
Tim
Onno Goedknegt wrote:
>
> Hi everyone,
>
> A few days ago I received Fishback's ODDS book and video.
>
> ODDS principle:
> 1. calculate historical volatility using a spreadsheet
> 2. by using statistical analysis (normal distribution: Bell curve)
> calculate the probable price range in the coming period
> 3. sell a stangle with stikes at the extremes of the price range
> 4. protect this short position by buying a higher call and a lower put
>
> My questions are:
> 1. can normal distribution be used to predict prices in the financial
> markets?
> 2. which period is the best to use for calculating historical volatility?
> 3. can historical volatility tell you something about the future prices?
> 4. can you earn money using this ODDS method in practice
> (remember bid/ask, commissions, slippage etc.)?
> 5. I don't understand the similarities between the ODDS system explained
> in the video/book and the ODDS system in Metastock 6.5 ? The only
> similarity I can see is: use volatility in option trading.
> 6. ODDS was published in 1994. In those years OEX volatility was much lower
> than today. Maybe ODDS doesn't work that well anymore in 1998 and maybe
> that's the reason it's now published...?
>
> I found it interesting to read ODDS. I have the impression ODDS can make a
> profit in the long run, because it is a "continuous strategy". You don't
> have to wait for a buy or sell signal.
> But I do think a lot of experiments have to be made before using this
> strategy, for example: what volatility period is best? Sell short period
> options and buy longer periods (theta factor!)?
>
> Is there someone out there who can tell me more about ODDS?
> Or is able to share hers/his experience with this system?
>
> Thanks!
>
> Regards,
> Onno
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