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<font color="#FF0000">Hello.</font><font color="#FF0000"></font>
<p><font color="#FF0000">Just and interesting "measure" of extremes.</font><font color="#FF0000"></font>
<p><font color="#FF0000">Fib 0.618 called the "mother" of all
Fib. relationships.</font><font color="#FF0000"></font>
<p><font color="#FF0000">Approx. 8/87 High 2750 X
0.618 ='s 16995</font><font color="#FF0000"></font>
<p><font color="#FF0000">I'd say they was pretty close to the actual Lows.</font><font color="#FF0000"></font>
<p><font color="#FF0000">Songyun</font>
<p>The DOCTOR wrote:
<blockquote TYPE=CITE>I don't know about 1929, but 1987 exceeded any statistical
measure. Well in
<br>excess of 5 which describes almost anything possible. The question
however is
<br>incorrect in it's nature. When you have events like 1929 or 1987
or major moves
<br>and non continuous pricing... the model you are using such as binomial
or a B/S
<br>benchmarks to wrong number. If 1987 was inches of a 5+ move than
the reference
<br>point of what would be +/- is invalid. That is why delta hedging
in options
<br>dies after 1987. Events cannot be 5 10 or 20 std. deviation moves
.. they are
<br>in fact 2 0r 3 std deviation moves and the perception of expected deviation
<br>alters. For example if the 108 point move on 10/16 of 1987 wasn't
<br>"extraordinary than the 500 point move on 10/19 wasn't really as "unexpected"
of
<br>an event.
<br>There used to be a MIT PhD on the board of the CBOE who quoted 10/87
.. if you
<br>benchmarked to implied volatility as a 22 std. deviation event.
he then went on
<br>to quote NATO's estimate of a war in Berlin with East German troops
and tanks
<br>breaching the Berlin Wall as 5 std. deviation event. So if you
used traditional
<br>volatility as benchmark 10/87 was much less likely than nuclear war
using the
<br>computer simulation. It is one of the reasons why "traditional"
benchmarks like
<br>historic volatility are only still used by former successful option
traders.
<br>Lionel Issen wrote:
<p>> How many standard deviations did prices move in the crash of 1929
and what
<br>> was the statistical probability of this happening assuming a normal
<br>> distribution?
<br>> Lionel Issen
<br>> lissen@xxxxxxxxx
<br>> ----- Original Message -----
<br>> From: Michael Suesserott <MikeSuesserott@xxxxxxxxxxx>
<br>> To: <metastock@xxxxxxxxxxxxx>
<br>> Sent: Sunday, August 13, 2000 6:14 AM
<br>> Subject: AW: What options to sell?
<br>>
<br>> > Gitanshu,
<br>> >
<br>> > thanks for your interesting post, and also for the friendly and
<br>> constructive
<br>> > approach you are taking. Like yourself, I entered into this thread
in a
<br>> > spirit of trying to be helpful. There is nothing I stand to gain
through
<br>> my
<br>> > posting here, and I assure you I would immediately fall silent
if any
<br>> > flaming arose from it.
<br>> >
<br>> > As you surmised, I am well aware of the points you are raising.
Though the
<br>> > counterexample you were using does not describe my position quite
<br>> > correctly - I would not think it advisable in Guy's case to buy
puts with
<br>> > only one week to go - still I agree that there are many different
spread
<br>> > positions that could be used to trade direction to good advantage.
<br>> >
<br>> > In fact, one additional strategy that I like to use sometimes to
trade
<br>> > direction is the sale of backspreads (provided volatilities are
right, and
<br>> > there is a certain volatility skew). So there are indeed many avenues
to
<br>> > explore in any given situation, as you were rightly stating.
<br>> >
<br>> > Now let me explain why I don't think these applicable in the case
of Guy's
<br>> > system.
<br>> >
<br>> > Anyone who has ever devised a mechanical trading system will have
had this
<br>> > experience: you change a certain parameter a little - just a little!
- and
<br>> > test results start diverging by a wide margin. Unfortunately, most
of the
<br>> > time this happens, results deteriorate.
<br>> >
<br>> > Now here we have this successful trading system that it took Guy
and his
<br>> > family 30 years to develop. Don't you agree that Guy would be well
advised
<br>> > to be extremely careful, even reluctant, to change his system?
<br>> >
<br>> > There can be no doubt that replacing futures with option spreads,
<br>> especially
<br>> > those where one gets short premium, thus limiting possible profits,
<br>> > constitutes a fundamental change of main characteristics of a trading
<br>> > system. To name only one effect that is immediately obvious - the
big per
<br>> > trade profits (up to 150 points, as Guy stated) just wouldn't have
<br>> occurred.
<br>> > It is true that losses (up to 62 points), too, might have been
less, but
<br>> > since the system had 19 winning trades and only 3 losing ones,
the use of
<br>> > credit spreads would very likely have led to a severe deterioration
of the
<br>> > system.
<br>> >
<br>> > Besides, many types of spreads require the use of stops, or at
least
<br>> > constant supervision and readjustment; readjustment "rules" are
not really
<br>> > clear-cut because there is a choice of option strikes and volatilities
and
<br>> > deltas, even different follow-up strategies, with the ensuing action
to be
<br>> > individually determined by the trader in each and every case. If
you can
<br>> > call this a "system" at all, it will certainly not be the same
system Guy
<br>> > had been trading before.
<br>> >
<br>> > That is why I didn't take spread trading into consideration in
my posts.
<br>> The
<br>> > only option strategy that would preserve the characteristics of
Guy's
<br>> system
<br>> > at least to a reasonable extent, would be the simple purchase of
puts or
<br>> > calls, as the case may be.
<br>> >
<br>> > This strategy may indeed prove useful in catastrophic situations
such as
<br>> the
<br>> > October 87 crash where prices moved more than 12 standard deviations,
an
<br>> > event that statistically should have occurred less than once in
the
<br>> history
<br>> > of the universe.
<br>> >
<br>> > Kind regards,
<br>> >
<br>> > Michael Suesserott
<br>> ></blockquote>
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