How to calculate probabilities?

[Kevin Schmit]

Quote from Jurek:

probability that a stock touch a specific price where can I find formula to calculate this?

As a rough estimate: 2 * N(d2)

Even rougher: 2 * delta

 

[Jurek]

Thanks for all the replys

 

[MasterAtWork]

Hi Kevin

Quote from Kevin Schmit:

As a rough estimate: 2 * N(d2)

Even rougher: 2 * delta

What if the delta is about 52% ?

 

[MasterAtWork]

Hi MGJ,

Quote from MGJ:

Assume Black-Scholes accurately models stock price movements. Assume you know the future volatility "sigma" of the stock's price action. Assume the stock price today is "P". Assume the price-to-be-touched is "S" (the "strike price").

The probability "X" that the stock will touch or exceed the strike price S, within T days, can be found thus:

Z = ln(S/P) / (sigma * sqrt(T/365))
X = CNDF(Z)

ln() = natural logarithm = log to the base e
Z = Zscore = size of price move from P to S, in standard deviations
CNDF() = Cumulative Normal Distribution Function

Now you just construct a summation.

The first term is the probability that the stock will touch or exceed the strike price within 1 day (T=1).

The second term is the probability that the stock DOES NOT touch or exceed the strike price withing 1 day, times the probability that the stock touches or exceeds the strike price within 2 days.

The third term is the probability that the stock DOES NOT touch or exceed within 2 days, times the probability that the stock does touch or exceed within 3 days.

Create 90 terms (for 3 months), add them up, done.

Don't forget that Black and Scholes model is priced under risk neutral probability. That means you expect the asset drift be the risk free rate.

 

[CaptainObvious]

Quick and dirty as it gets:
Look for best leverage. Multiply stock price by Option Delta, then divide by option price. Or Divide stock price by option strike price. Look for >10:1 leverage.

 

[Kevin Schmit]

Quote from MasterAtWork:

What if the delta is about 52% ?

For deltas over 50 use 1 minus delta.

So 2 * 48 = 96% chance iof touch, very approximately.

 

[MasterAtWork]

Quote from Kevin Schmit:

For deltas over 50 use 1 minus delta.

So 2 * 48 = 96% chance iof touch, very approximately.

This way a delta aroud 96% (deep in the money option), then it's 100%-96%=4%
So 2*4%=8% chance of touch

I agree it's very approximately

 

[HurricaneUS]

Quote from dtrader98:

Look under probability to occur an eventual absorption of geometric Brownian motion and expected first hitting time. Nice free site includes excel calculator to extract these numbers under monte carlo simulation of paths.
You simply enter estimated drift and variance of the instrument you are looking at.

http://www.puc-rio.br/marco.ind/hittingt.html#spreadsheet

Thanks for that link...I've set this up and I am going to make so much fucking money with this calculation that I'm about to crap my pants...

 

[Nicolaskao]

Use the support and resistance price as base, and check the momentum, direction and strength of the trend on the underlying stock.

The chances of the price oscillating within the supp. and resistance is greater if the momentum and strength are not abnormal.

 

[justrading]

Quote from IV_Trader:

fast check...straddle primium * 1.5

May I ask why you multiply by 1.5?

Futures Mag option article always uses the straddle price premium alone for closing price zone. I have not tested it.