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Asymmetric Volatility (Part 1)

Asymmetric Volatility (Part 2)

Asymmetric Volatility (Part 3)

Asymmetric Volatility (Part 4)

Asymmetric Volatility (Part 5)

Volatility & Market Sentiment (Part 1)

Volatility & Market Sentiment (Part 2)

Volatility & Market Sentiment (Part 3)

Volatility & Market Sentiment (Part 4)

Volatility & Market Sentiment (Part 5)

.I have one question.For a given stock in a given time how often is occurence of M size move compared to 2M size move.My studies over 20 years conclude that M size move should be 4 times more common than 2M size move—based on square root of time principal for option pricing/odds of move of a given size in the underlying in the BLACK SCHOLES formula. BLACK SCHOLES may not be perfect–but the fact remains that trillion dollars of derivatives are traded each day based on this formula & option market makers make money year after year & laugh all the way to the BANK.Similar to relationship between price of one month option versus price of 4 month option,If it takes one month to get M move, it would take 4 months for 2M move in the same stock in the same time period.This tells me that if human brain is kept out of the equation & in SYSTAMATIC(automated) investing in stocks, take profit be 1/2 the size of stop loss( & we already know that markets are RANDOM) then over thosands of RUNS investor shall make a whole lot of money.Out of four trials one makes one dollar 3 times & loses 2 dollars one time with net profit of one dollar–all one has to do is that when take profit is HIT, cancell the unfilled stop loss order & repeat the process over & over.Investor stays direction neutral at all times with no bias long/short.This is not just a theoretical question–if you spend few hours pondering this question I bet your next 5 generations can make tons of money over the next 500 years,just clicking on the LAP TOP & would never have to look for A JOB.Any criticism would be appreciated.Thank you for your help in advance.

Dr Prem Nath MD cell# 845 641 6778 email indus68@gmail.com

I am sorry for the late reply. It is literally impossible to determine a general rule which allows to trader to understand the occurence of M size move compared to 2M size moves for every market in the world. Clearly, if we talk about sigma 10 events or more then the occurence is order of magnitude higher than 2-3 sigma movements of the underlying. The Black-Scholes-Merton formula is based on normal distribution and it assumes that the underlying market follows a geometric borwnian motion process, hence, it is far from being perfect but it is useful because it is based on a good and simple engineering process. Market makers use that formula for pricing options but the best ones are well aware of where the formula fails. There are different closed formulas for European options but for American options the majority of market makers adopt binomail or trinomial trees. You also wrote “Similar to relationship between price of one month option versus price of 4 month option,If it takes one month to get M move, it would take 4 months for 2M move in the same stock in the same time period”….I advise you to keep put of the market if this is the way you think. there are a lot of discrepancies, price changes,idiosyncratic variables and unexpected news or events that make this rule useless 9 times out of 10.

Furthermore, you also added that “Out of four trials one makes one dollar 3 times & loses 2 dollars one time with net profit of one dollar”…the problem here is that you have absolutely no certainty about making 3 dollars on 3 good trades. It could even be that you win 3 times and you win $ 0.50 each time but you lose $ 5 in the last attempt because the profit is determined not fro the entry point and not from the stop loss.Everything depends on the strategy that you use.

Moreover, you said “Investor stays direction neutral at all times with no bias long/short.” this is not true. The majority of investors take long views on the direction of the market (3 or 6 or 9 months) and then place the trade accordingly. Look at the global macro funds or the typical old style hedge funds they employ directional strategies. The funds which do not follow any direction are called relative value funds and they work primarily with options,volatility swaps and variance swaps.

you wrote “all one has to do is that when take profit is HIT, cancell the unfilled stop loss order & repeat the process over & over” do you realise how much money you would lose following this appraoch? if you are a trader/fund manager how are you going to justify this to your investors? Trust me telling them that they are eventually going to get all the money back in 15 years from now will not help you.

Lately, “if you spend few hours pondering this question I bet your next 5 generations can make tons of money over the next 500 years,just clicking on the LAP TOP & would never have to look for A JOB” this is not the right approach to trading. Ask any trader or fund manager who has been in the business for a while and they will tell you that this is not the way to manage the risk.

This is just our opinion. Thank you for visiting our blog and for posting your question.

The HyperVolatility team