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Strategies & Market Trends : Options
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To: Tom K. who wrote (1291)1/18/2000 11:52:00 PM
From: manohar kanuri  Read Replies (2) of 8096
 
If volatility is 20% on a $50 stock your one std. dev. would be $20 (20% on both sides of the "mean" of 50, ie., 40 to 60).

So at the end of one year 20x3 would capture 99.?% of possible price outcomes. You'll have to jog something in there to fit it into a lognormal distribution so you don't end up with a price less than zero on the downside. Can't recall offhand the whys and wherefores of how the model accomplishes that; I think it had something to do with relative changes being normally distributed and absolute changes lognormally distributed? For estimations, implied volatility = 1SD works fine for me. Such sloppiness probably wouldn't work in LTCM? Oh wait, they went belly up....

You're right about deriving the daily from the annual number.
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