The Skinny on Options: Abstract Applications

The Law of Large Numbers

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.

The Law of Large Numbers is very much a prerequisite to the Central Limit Theorem. In order for us to have a chance at the results that the CLT shows are possible, we need to ensure we have a large enough number of observations. Within this law, we could have "weak-form convergence" or "strong-form convergence", with the difference basically being convergence that is probabilistic in nature or certain in nature, respectively.

Taken together, the CLT and LLN yield a powerful explanation for the mathematics behind "Trade Small, Trade Often".

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