That distribution doesn’t look like “the default is for stock to rise” :-)
Its not—stocks rising is the prior, this is my posterior.
If this is so, you can take a position in the markets which is guaranteed to make you money, either a lot (in the first case) or a little (in the second case).
Exactly what instruments would guarantee this return? A mixture of shorts and options?
The simplest would be a put spread. You would buy deep out of the money puts and write (sell) other OOM puts much closer to the current price. You will buy more deep OOM puts than sell shallow OOM puts, however because you will be buying cheap puts and selling expensive ones you will start with a positive balance. In the case of markets going nowhere or up, both sets of puts expire worthless and you keep your difference in premium (you earned a little money). In the case of the crash, both sets of puts expire in the money, but you are long more puts than you are short, so you make a lot of money.
Its not—stocks rising is the prior, this is my posterior.
Exactly what instruments would guarantee this return? A mixture of shorts and options?
The simplest would be a put spread. You would buy deep out of the money puts and write (sell) other OOM puts much closer to the current price. You will buy more deep OOM puts than sell shallow OOM puts, however because you will be buying cheap puts and selling expensive ones you will start with a positive balance. In the case of markets going nowhere or up, both sets of puts expire worthless and you keep your difference in premium (you earned a little money). In the case of the crash, both sets of puts expire in the money, but you are long more puts than you are short, so you make a lot of money.