|
PureBytes Links
Trading Reference Links
|
How many standard deviations did prices move in the crash of 1929 and what
was the statistical probability of this happening assuming a normal
distribution?
Lionel Issen
lissen@xxxxxxxxx
----- Original Message -----
From: Michael Suesserott <MikeSuesserott@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Sunday, August 13, 2000 6:14 AM
Subject: AW: What options to sell?
> Gitanshu,
>
> thanks for your interesting post, and also for the friendly and
constructive
> approach you are taking. Like yourself, I entered into this thread in a
> spirit of trying to be helpful. There is nothing I stand to gain through
my
> posting here, and I assure you I would immediately fall silent if any
> flaming arose from it.
>
> As you surmised, I am well aware of the points you are raising. Though the
> counterexample you were using does not describe my position quite
> correctly - I would not think it advisable in Guy's case to buy puts with
> only one week to go - still I agree that there are many different spread
> positions that could be used to trade direction to good advantage.
>
> In fact, one additional strategy that I like to use sometimes to trade
> direction is the sale of backspreads (provided volatilities are right, and
> there is a certain volatility skew). So there are indeed many avenues to
> explore in any given situation, as you were rightly stating.
>
> Now let me explain why I don't think these applicable in the case of Guy's
> system.
>
> Anyone who has ever devised a mechanical trading system will have had this
> experience: you change a certain parameter a little - just a little! - and
> test results start diverging by a wide margin. Unfortunately, most of the
> time this happens, results deteriorate.
>
> Now here we have this successful trading system that it took Guy and his
> family 30 years to develop. Don't you agree that Guy would be well advised
> to be extremely careful, even reluctant, to change his system?
>
> There can be no doubt that replacing futures with option spreads,
especially
> those where one gets short premium, thus limiting possible profits,
> constitutes a fundamental change of main characteristics of a trading
> system. To name only one effect that is immediately obvious - the big per
> trade profits (up to 150 points, as Guy stated) just wouldn't have
occurred.
> It is true that losses (up to 62 points), too, might have been less, but
> since the system had 19 winning trades and only 3 losing ones, the use of
> credit spreads would very likely have led to a severe deterioration of the
> system.
>
> Besides, many types of spreads require the use of stops, or at least
> constant supervision and readjustment; readjustment "rules" are not really
> clear-cut because there is a choice of option strikes and volatilities and
> deltas, even different follow-up strategies, with the ensuing action to be
> individually determined by the trader in each and every case. If you can
> call this a "system" at all, it will certainly not be the same system Guy
> had been trading before.
>
> That is why I didn't take spread trading into consideration in my posts.
The
> only option strategy that would preserve the characteristics of Guy's
system
> at least to a reasonable extent, would be the simple purchase of puts or
> calls, as the case may be.
>
> This strategy may indeed prove useful in catastrophic situations such as
the
> October 87 crash where prices moved more than 12 standard deviations, an
> event that statistically should have occurred less than once in the
history
> of the universe.
>
> Kind regards,
>
> Michael Suesserott
>
|