Simkin: Black-Scholes wrongly assumes stock distributions are right-skewed, not left-skewed
Todd Simkin · Todd Simkin - Game of Trading at Susquehanna (EP.399) · Aug 5, 2024 · at 46:25
Todd Simkin is Associate Director at Susquehanna International Group (SIG). He explains how SIG's options trading strategy diverged from conventional Nobel-winning academic models.
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“The Black-Scholes model, which is literally Nobel Prize winning math, this is amazing stuff, has assumptions built into it that we know are just wrong. Among the assumptions that are built in is a normal distribution of stock returns, which would lead to a log normal distribution of stock prices, which, for any of the non-mathematically minded people, you might want to tune me out for the next minute or two, but that means that it's a right skewed distribution, and what that implies is that the median and the mode will be below the mean. Again, Putting that in layman's terms, most of the time you would see the market drift down a little bit. Day after day, you would see it down a little bit, and sometimes you would see it just boom. You would see it double in value. What we've actually experienced with stocks is the opposite of that, that most of the time stocks are up a bit, that your best guess on the value of a stock three months from now is that it's going to be up a little bit more than where it is today, and sometimes it's going to be down a lot. And that's a left skewed distribution”
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