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To: Trader X who wrote (9814)	11/26/1997 9:13:00 AM
From: Patrick Slevin	Respond to of 17305

I snipped this off a discussion group. I thought you might find it interesting, with respect to the mathematical probabilities of major swings. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Hi Doc and RT's A few months ago you made the statement on CNBC that a 400 point move on the Dow was possible about once each month (I think I have that correct). Ron Insana almost choked when he herd that. In light of the recent Dow moves, what is your current position on volitility? What did (do) you base that call on? Is there a simple mathamatical way to calculate the extreams and the likelyhood that they will be reached? Thanks in advance for your responce. Good luck and good trading, ~~~~~~~~~~~~~~ Subject: Re: Question on Volitility Date: Sat, 15 Nov 1997 18:20:38 -0600 From: ~~~~~~~~~~~~~~~~~~~~~~~~~~ To: ~~~~~~~~~~~~~~~~~ CC: ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ It is a pretty simple calculation. I merely took the VIX...currently about 34%......this reprsents an annualized number...and converted it into a one day estimate. The vix assumes about 300 observations a year for volatility. Converting a yearly number to a daily number is simply taking the year # 34% and dividing it by the square root of the days. The square of 300 is about 17. I'm doing very rough math to keep it easy. 34% annual vol divided by 17(to convert to daily)is 2%. A one std deviation move would be +/- 2% (this should happen about 68% of the time. A two std dev move would be +/- 4% A three sd move would be +/- 6% and this should/could occur about 1% of the time. With a Dow at 7600 this equates to about a 450 point move which we Could see more frequently than once every ten years. The fact that we had one soon thereafter is sort of indication that we are really in a very volatility market. In previous posts I've talked about the "fat Tails" condition which actually distorts implied vol and of course the VIX. Real implied, if the price distribution were normal, would be lower. Except for the last decade we have lived in a period of non normal distributions...the condition of fat tails. Fat tails are probably associated more with the state of technology and trading cost(TOO LONG TO POST THE WHOLE CONCEPT),but essentially because it's cheaper and easier to trade, there is much more trading and therefore the market moves and stock moves are probably bigger than expected. I did a seminar this morning for an Omega users group in 1000 Oaks California and the topic of key interest was vol. Vol is what short term option trading is all about...and one should have a good understanding of it....a real opinion of where it will be on the next day...or they should avoid short term trading. I know it sounds like a tease...but people who understanding option vol have been coining money all year. There were actually a series of parties in Chicago Tuesday night after the market break. The kind of success stories being tossed around all had $1,000,000 plus numbers attached to them. If you want to learn more a must read is Shelly Natenberg's book on Vol based trading. Good luck. A two std deviation move would be +/- 4%