Understanding how the market is behaving is critical for stock and options traders alike. It is important to understand the price action of individual stocks, commodities, bonds and the asset class indexes as well. A sound investment thesis is built on the back of facts and fundament analysis. The timing of an investment is built on the back of technical analysis. One of the tools we use to understand how prices are behavings is to look at the distribution of historical prices against a random walk. We want to know if the price of the asset in question is jumping or stagnating, trending up or down, etc. If there is a bias, we want to find it. We look at this as an additional data point to help us determine the optional option strategy that is consistent with our thesis. The following table examines the historical distribution of SPY (the ETF designed to track the S&P 500) as compared to a random walk.
