Does the market have a "memory?" If there are three "up days" in a row, what is the probability of a fourth "up day?" Find out!
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Understanding the probabilities in options trading is crucial to tastytrade mechanics. Today, Mike Rechenthin (known as Dr. Data) uses his PhD in Management Sciences to determine the probability of a fourth up day in the market after three consecutive previous up days. Using Bayes' Theorem and over 65 Years of S&P 500 data, the probability of a “4th up day, given 3 consecutive up days” is 53.1%.
What’s especially interesting is that we found the probability of a 5th consecutive up day or a 6th or a 7th is all around 53%. Which is the same probability of having a “normal” up day, not conditional on any previous event whatsoever.
Math is the most feared four-lettered word around, even to Tom and Tony. Luckily the well dressed Dr. Data is here to show how to tame the beast and even use it to make money. Check out his segments on analysis and data manipulation to understand the reasoning behind our trades.
You can watch a new Skinny on Options Data Science episode live and check out all previous episodes everyday at http://ow.ly/EoyGW!
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