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Systematic and Automated Option Trading (Collection) by Sergey Izraylevich, Ph.D., Vadim Tsudikman

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chapter 2. Review of the Main Criteria

2.1 Criteria Based on Lognormal Distribution

2.1.1 Description of Lognormal Distribution

The effectiveness of option combinations evaluation is mainly determined by the accuracy of the underlying asset prices forecast. One of the possible ways to produce a forecast is building the probability distribution of the price. When applying this method we do not try to predict the future price exactly but estimate the probabilities of many possible outcomes. For the discrete price scale, the distribution is established by assigning probabilities to all outcomes. In the continuous case probability, density functions are used. We begin to create criteria for evaluation of option combinations with applying one of ...

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