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PACHINKO and the WORLD OF STOCKS
PART II

 

 

Imagine the ball being the value of the stock. Everytime a nail is hit, the stock value - due to some random transactions - gets a kick, a percentage change. It could be a rise or a fall - completely randomly. The average size of the kick is called - in financial terms - volatility. The time between the rows of nails is just the time interval between these fluctuations. The final position of the ball - the bin it's ending up in - corresponds to the stock's value after all the fluctuations took place. If it went to the right the stock price went up, if the ball ends up in a bin left to the center, this means the stock was falling.

 

There is no way you can predict the final value of the stock. But trying out the random walk many times you can determine the probability of the stock having a specific value in the end.

Option Pricing is based on Probabilities - NOT on one specific outcome.

 

 

And what if I have bad luck?