Combining method/model probability with option probability

B

bln

Combining trading method/model probability with option structure probability

How do one merge the probability numbers for these together into one combined probability?

Lets say you got a model that give you the probability of 60% for the price to be higher than current spot and 40% probability that it will be lower than current spot X days forward.

And you got a vertical options structure, lets say a spread which is OTM strike and got a winning probability of 80% and losing of 20%.

What will be probability for winning the trade? how do the math look like?
 
That obviously depends on how much weight you want to give to your own model and how much weight you want to give to the implied volatility derived from the option prices. If your model rocks then go with it and ignore the implied volatility numbers. Now you're rich. If you don't know how well your model works then you need to place some objective measurement on that before proceeding.
 
@bln, what a coincidence: I'm working on same/similar problem: converting the options profit diagram to a probability space p (ie. 0 to 1, or 0% to 100%). This is different from normal and lognormal distribution, hopefully more useful in trading.
The problem I encounter is the "open-end" at the right side. At the left there is the 0 border, but at the right side there is none, and this makes it difficult for me finding a solution so far.

Update: got some new ideas... I think I shortly will be able to solve both your p-problem and mine. But I'm solving it first for my case as it differs from a spread, ie. the maths is not the same.
 
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earth_imperator said:
@bln, what a coincidence: I'm working on same/similar problem: converting the options profit diagram to a probability space p (ie. 0 to 1, or 0% to 100%). This is different from normal and lognormal distribution, hopefully more useful in trading.
The problem I encounter is the "open-end" at the right side. At the left there is the 0 border, but at the right side there is none, and this makes it difficult for me finding a solution so far.
More...

When you realize black scholes is wrong and is part of the scam to keep your down, you will find the solution to your problem.
 
Shows you have no idea what you are talking about. BS is a translation tool between implied volatilities and prices, nothing more. It is not a valuation tool.

newwurldmn said:
When you realize black scholes is wrong and is part of the scam to keep your down, you will find the solution to your problem.
More...
 
I have always thought option pricing could be used for stops and profit expectations. Now with weekly options it could be useful. I just could never figure it out and quit trying some years ago.
 
Hari Seldon said:
with weekly options it could be useful

I just could never figure it out and quit trying some years ago
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Quitting accomplishes nothing. The Devil tempts you to give up.
If you can figure it out with patience and intelligence and an open mind....like Indiana Jones finding the Holy Grail...you can unlock the keys to the kingdom universe,
 
M.W. said:
Shows you have no idea what you are talking about. BS is a translation tool between implied volatilities and prices, nothing more. It is not a valuation tool.
More...

don’t post when you don’t know the backstory. The OP is a reincarnation of another user: botpro.
 
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