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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: mitch-c who wrote (51175)	8/27/2001 4:50:15 PM
From: Robert O	Respond to of 70976

mitch, interesting comments. First let me say that I really was just quipping 'z-test' term at the end, a kind of tongue in cheek on 'smell test.' I was really just wanting to get at the imagery of confidence intervals (% under Bell curve) agreeing that a discrete strike price didn't fulfill the needed type of continuous range. Having said all that I'm surprised you still will not knuckle in and agree your range is far too liberal, making predictive value non-useful at best and inversely predictive at worst. I don't have the stats background to follow granularity, thought that applied to sugar and bullets ;-) But you kind of sidestepped what I think is the most relevant issue which is that Ben A. himself is constantly updating the Max-Pain™ figure by looking at all outstanding (open interest) puts/calls and determining their value. Final update appears to be the Wen. just prior to 3rd Friday's expiry. My guess is that a majority of new action in options nearer to expiry will be in contracts closer to the strike closest to the current price! This makes sense, since even crazies like me are not willing (aka dumb enough) to make a bet on a way outside the money option play near expiry. Much of the outside the strike range options are already effectively worthless coming into final week so they will not be the major effect on max-pain™ figure. I guess the previous point is that one is getting the greatest possible advantage (to prove Ben's null hypothesis that the closing price for a security would tend to be 'attracted' to a price nearest the price that would cause the most loss for option holders and most gain for option writers ie the Max-Pain™ point) by updating the Max-Pain™ just prior to expiry. Now, for a security like AMAT there is a good deal of volatility daily anyway. With a Beta at 2.25 and assuming (don't know) an average 1% S&P daily volatility, we are already getting a little 'cheater' help as is. We could get 2.25% movement just as normal daily volatility. Now you want to add far more leeway to the range around the closest strike? Last point is that I understand what you mean by wanting to be more confident (in a play that predicts price should come into the wider range you've allowed) when price is well outside a tighter range, but then aren't you probably seeing one of the many 'noise' effects that the site specifically points to as a reason for the data not to fit, i.e. swamps the hypothesis. I'd be far more fearful I was in the swamp scenario than a sure thing scenario. I'll send a copy of this to Ben and see if he has any thoughts here, as the TM holder I'll give his ideas plenty of weight, if you will ;-) RO