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Here is the math: stdev = (ln(future_price/current_price))/(volatility*sqrt(days_til_expiry/252)) probability = normsdist(stdev) The probability is the area under the curve to the left of the future_price. I generally calculate 20-day historic volatility, and find the probability for 20...

Look, only one of three outcomes is possible in a strangle: 1) The price of the underlying is above the higher strike at expiration 2) The price of the underlying is below the lower strike at expiration 3) The price of the underlying is between both strikes at expiration There is a...

Import the data into Excel, and use its descriptive statistics functionality to get the skew and kurtosis. I've never looked into it, but perhaps the free OpenOffice product can do the same thing. I can tell you that all distributions from financial times series have some degree of skew and...

If the area under the bell curve above the higher strike is p=0.3, then the area under the curve below the strike is 1-p = 1-0.3 = 0.7. For the second lower strike the area below that strike is p2 = 0.3, and above 1-p2 = 0.7 Therefore area between strikes is (1-p) - p2 = 0.7 - 0.3 = 0.4

I've never used this indicator specifically, but I imagine it is like every other indicator ever devised; sometimes it works, and sometimes it doesn't. Probably no better than random. Perhaps if you combined it with some position sizing, and risk management, it may give a small positive...

The skew is relatively flat for long dated options. I've never delta neutral traded using LEAPS, maybe it's worth a look.

Make sure you stick primarily with one language and make that your specialty and career. Don't try to be a C++ developer and a Java developer and a PHP website developer. Try to pick one language/technology and become an expert. Yes, along the way you will have to pick up some SQL to be able...

I stopped writing all my own trading code when I found this site. http://www.stockfetcher.com

You won't pick the exact bottom on this sell-off, so don't wait for it, thinking you will. The way to play this is to decide on how many shares you ultimately want to buy, and start to build a position. For example: You want 200 shares, pick an ultimate stop price, and start buying 50 shares...

An assumption that the markets are completely random means I can enter at any time and always have 50/50 odds of being right about a given directional bet. Pattern recognition is an attempt to get better than 50/50 odds on a given directional bet. I could certainly take non-directional bets...

An assumption is the root of all screw-ups. If you build a trading system on that assumption, you will get your head (and wallet) handed to you at some point. I've come to believe that you need to pick setups (i.e. patterns)that you think have a greater than 50/50 odds, and then place your...

You don't need to be an implied volatility genius, with a Ph.D. in math to trade in volatility. Being a volatility Forest Gump will suffice i.e. knowing when IV is relatively high, or relatively low. However, if you get the direction of the underlying wrong, it will be hard to make money with...

The way Taleb prepared for a possible Black Swan was (is?) to take low risk, and the same time take large risk. In other words, he bought T-Bills with his funds, and used the interest earned to pay for the OTM option premium. It is still debated on ET as to what kind of return he earned for...

Shifting is just curve fitting the MA to the price. Like all indicators, it is still backward looking and has no direct predictive quality. The way I personally use MAs is to pick a time period and just do a simple analysis to see if price is above or below the line. I have started using price...

Generally speaking, RAID is not a substitue for doing regular backups. However, unless you keep the backups some other place than at home, a flood, fire, or other natural disaster will still take out both your RAID array, and your backups.

Here is an answer to the original question. It is an algorithm to compute IV, using the Method of Bisections. Developed by Bernt Odegaard. #include <cmath> #include "fin_recipes.h" double option price implied volatility call_black_scholes_bisections(const double& S, const double& K...

Volatility = stddev(ln of return relative)*sqrt(365) or sqrt(252) if you prefer trading days over calendar days. Also, your standard dev. is calculated over a period of time, such as 20 days for monthly volatility, or 5 days for weekly volatility.

Generally, the closer to expiration you get, the more pronounced the smile becomes. This is some German Bund data I believe.

If you know a bit of computer programming, the following link has some good algorithms. http://finance.bi.no/~bernt/gcc_prog/recipes/index.html

The problem is that so many people make claims, performance or otherwise, without providing any objective scientific evidence. No independently reviewed statistical data. Of course, why should they? This is an anonymous board and if they did reveal a system with a true statistical edge, it...