|
PureBytes Links
Trading Reference Links
|
At 4:52 PM -0400 6/11/98, Stuart Hazlewood wrote:
>The idea that an option position can provide a 90% chance of success is
>based on the Gaussian calculation of volatility (standard deviation),
>itself based on the assumption that market returns are distributed
>normally.
>Edgar Peters' work on chaos theory suggests that this assumption is
>fallacious. Noteably, his analysis shows that a normal distribution
>underestimates the occurrence of a +1 sigma event and a + or - 4 sigma
>event in the S&Ps. It also overestimates the occurrence of a + or - 2
>sigma event. (moreover, this holds true over any time frame - dailies,
>minute bars, whatever)
Peter's second book, "Fractal Market Analysis", covers this in detail on
pages 224-232, specifically referring to a more accurate and much more
complicated option pricing formula by McCulloch which takes into account
the fractal nature of the markets.
You might like to study this. (Pretty heavy math.)
Bob Fulks
|