Question from a friend

[suki]

do you know a formular I can use to determing the probablity of a share reaching a certain value at a particular date in time? this is primarily used in options trading, working out the probability that a share will reach a certain price in some future date, which will determine the likelyhood that you gain/loose money

[SimonPB]

most regularly used is black scholes .. your probability is essentially the delta .. it givves prob of being at strike by date ..

[Quakedog]

Sounds like horse!!

[SimonPB]

they won a nobel prize for this formula .. so seriouus math .. and there is a third chap neevr mentioned, merton ..

[Levitt]

http://en.wikipedia.org/wiki/Black%E2%80%93Scholes

[suki]

Thanx

[john_1]

well lets be honest those clever chaps, started a hedge fund based on their logic and formula and it nearly brought down wall street (the last time)it may still be used but it is actually serriously flawed..in that nobody can price the future because its unknown....what it does do is price the known quite well...in that when it is clear a share will not reach a price in time..then the rate at which it loses value is quite effective... not the same thing as knowing the potential of an unknown outcome...

[SimonPB]

no the formula worked and made money .. but LTCM couldn't cover the margin calls .. it was gearing that killed them, not B-S ..

[THRESHOLD]

Black Scholes has been the subject of some not inconsiderable negative press over the past couple of years. If I am not mistaken, their initial precepts were drawn into question.

[john_1]

well gearing is the exact point of a warrent..so split a hair...they *****ed up based on the fact they were selling outliers vs buying them...they believed their own lie that markets return to the mean. Another believer in effiecent market *****... go revist that graph on ticker talk...markets and means are almost always parted..and with them the fool and his LTCM money!

[#11]

They attempted to fit daily stock market movements into a bell curve, the way you could do that for average adult heights for example. Now in average adult heights a height of 10 cm or 400cm is practically impossible, but an extreme stock index drop is much more likely, and that is what caused their house of cards to crash down. Good book to read is the "Ascent of money" in which this is described.

[john_1]

exactly outliers vs bell curves.