Normal Distribution Based Strategy

Normal Distribution

In probability theory there is a distribution called Normal distribution. The above curve gives the probability of a move based upon mean and standard deviation. As we can see above the probability of a 4+ standard deviation move is almost zero.

Nifty Weekly Returns Distribution

Now lets look at the nifty weekly returns distribution over last 24 years data.

Max         15.44%

Min        -15.95%

Mean       0.25%

StdDev 2.986035538


BankNifty Weekly Returns Distribution

Similar Analysis for the BankNifty, Last 12 years Data 

Min     -19.27%

Max     +15.45%

StDev 4.040712925

Mean 0.24%

Strategy

Since the market fell very quickly in the month of March, this raised the volatility to very high levels.  Due to this even the options which were 15% to 20% away from the spot were giving more returns as compared to FD if one sold them. Using the Normal distribution theory and selling options ~20% away from current Nifty value, i was able to make good profit over last 7 weeks.

Banknifty Analysis on last 5 years data

Analysis on one lot.

5% -- 230 (2712), 30(9788) -- 327000, 88.46% times profit, 186% annual return

6% -- 243 (1755), 17(10745) -- 243800, 93.46% times profit, 138% annual return

5% loss pay off graph

6% loss pay off graph

Related Videos

1. https://www.youtube.com/watch?v=XP2IUUO4b3M&t=2416s