[TheOptionClub.com] Questions about MCatolico's Adjustment PDF

 

Hello all --

I've been studying Michaels PDF in the files section and I came across some text in it (I listed the text in question at the bottom of this post) and have a question about it. The way I read it is that if any price move in ONE DAY happens greater than the 1.5 std.dev. that would trigger an adjustment.

My questions are:

1) What if the stock moved consistently in the same direction, moving $1.50 per day? At what point would I make the adjustment? Still at the $2.27 (1.5 std.dev) mark?

2) Once you make an adjustment, do you re-calculate the std.dev. from the current position of the underlying and again wait for those points to get hit to make another adjustment?

Here is the text below that I'm referring to:
"As a start, let's assume that market noise involves any kind of price move less than 1.5 std.dev. which would include 86.6% of expected price behavior. Following the above example, 1.5 std.dev. equals $2.27 so we are, by fiat, deciding that any one day price move less thatn +/- $2.27 will be ignored. But if price somehow goes beyond this level, we are determining that the move is significant enough to justify making an adjustment to the position."

Thank you,

-Jaime

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