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The Skinny on Options: Abstract Applications

Leptokurtic Distributions

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

As quantitative traders, we lean heavily on the statistical moments of a distribution, such as its mean, standard deviation, skew, and kurtosis. And we have already seen that with positive kurtosis and leptokurtic distributions, we will observe a greater number of extreme observations than we would have expected. But interestingly, another consequence of a leptokurtic distribution is that most of the observations will be more tightly clustered around the mean than they would have otherwise been. This is incredibly advantageous for the premium seller.

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