Vicarisi Ventures | Probability Theory

What is Probability Theory?

Probability theory is the branch of mathematics concerned with probability. If asset prices are nothing more than a stochastic process, then the stock market, and specifically the options market, is nothing more than a game of probabilities. Play your cards right and you will be mathematically guaranteed to succeed as time reaches infinity.

What is the Gaussian Distribution?

In probability theory, the Gaussian distribution is a continuous probability distribution for a real valued random variable. The returns of an asset are random points derived from these curves. The shape is dependent on two parameters: stochastic drift and implied volatility. In the plot below, there are four curves. Each has a different implied volatility. Notice how the shape, which represents the structure of future returns, changes.