Standard Deviation - Mathematics of a Price Cycle

Question 1

The binomial distribution model:

a) is only valid if the asset is liquid
b) can help you to learn how to trade in illiquid products
c) limits how far price can go in any direction
d) only a and c

Answer 1

a) is only valid if the asset is liquid

Question 2

An asset that has most of it data points spread out from the mean:

a) is most likely to be very volatile
b) needs a very high rate of return to be considered for an investment
c) will rarely be suitable for most investors
d) all of the above

Answer 2

d) all of the above

Question 3

A congestion market is characterized by:

a) a rotation of price about the mean
b) a rotation of price about the at-the-money straddle
c) invisible barriers at +/−1𝜎
d) all of the above

Answer 3

d) all of the above

Question 4

What is true about the at-the-money straddle?

a) It is always less than 1𝜎 from the current underlying price.
b) It is always in strong hands.
c) It is always in equilibrium.
d) All of the above are true.

Answer 4

a) It is always less than 1𝜎 from the current underlying price.

Question 5

What is true about the mean?

a) It is always the at-the-money option strike.
b) It will have the highest delta.
c) It varies from asset to asset.
d) Both a and c are true.

Answer 5

a) It is always the at-the-money option strike.

Question 6

Standard deviation:

a) is only valid in the at the money strike
b) is a measure of volatility
c) works best in volatile markets
d) creates a limit to how far price can fluctuate

Answer 6

b) is a measure of volatility

Question 7

What is true about a blowoff market?
a) The market will be at +/−3𝜎.
b) It cannot be traded by a retail trader.
c) High-frequency traders create the market.
d) None of the above is true.

Answer 7

a) The market will be at +/−3𝜎.

Question 8

A trending market will usually occur:

a) +/−2𝜎
b) when the shorts are squeezed out
c) when the longs are squeezed out
d) all of the above

Answer 8

d) all of the above

Question 9

A congestion market usually occurs:

a) within +/−1𝜎 of the mean
b) when the strong and weak hands change position
c) when new money joins the strong hands
d) a and b only

Answer 9

d) a and b only

Question 10

Double tops and bottoms usually occur when:

a) the strong hands and weak hands change position
b) the market cannot move more than +1/−1𝜎 from the current at-the-money straddle
c) the market is recovering from a blowoff
d) a and b only

Answer 10

d) a and b only