probability distribution formula?

Crevalle · Mar 16, 2005

Just buy Hoadley's options package--it's worth it. You can go behind-the-scenes and see how things are calculated, etc.

Also, FWIW, according to Natenberg, the delta is usually very close to the probability the option will be in the money at some point before expiration. I personally found that interesting.

ex. .063 = 6.3%

Moreagr · Mar 16, 2005

Quote from MTE:

252 is better, 'cause that is the actual number of observations that you get in a year.

As for volatility you can use both to get a better estimate.

MTE, should i avg. H.V and I.V and also which H.V works best there is 1 week,1 month, 1 year calculations?? I am assuming the one week data is more accurate.

I am mainly concerned with intraday pricing for equities only.

Thanks

MTE · Mar 16, 2005

Quote from Crevalle:

Just buy Hoadley's options package--it's worth it. You can go behind-the-scenes and see how things are calculated, etc.

Also, FWIW, according to Natenberg, the delta is usually very close to the probability the option will be in the money at some point before expiration. I personally found that interesting.

ex. .063 = 6.3%

I second that, Hoadley's package is well worth those $50 or so.

By the way, Delta is the probability that the option will expire ITM, not that it will be ITM at any time prior to expiry.

Moreagr · Mar 16, 2005

Quote from Crevalle:

Just buy Hoadley's options package--it's worth it. You can go behind-the-scenes and see how things are calculated, etc.

Also, FWIW, according to Natenberg, the delta is usually very close to the probability the option will be in the money at some point before expiration. I personally found that interesting.

ex. .063 = 6.3%

yes, I breezed by there site and thought is was mainly for options trading... I am still learning options and am in my infancy still...

the site looks very promising ....

Does Hoadly's package have studies for equities based on option data? or only strictly for options

sorry if this was a stupid question.

thanks

Crevalle · Mar 16, 2005

Quote from MTE:

I second that, Hoadley's package is well worth those $50 or so.

By the way, Delta is the probability that the option will expire ITM, not that it will be ITM at any time prior to expiry.

Ahh...thanks for the correction. I was under the wrong impression.

MTE · Mar 16, 2005

Quote from Moreagr:

MTE, should i avg. H.V and I.V and also which H.V works best there is 1 week,1 month, 1 year calculations?? I am assuming the one week data is more accurate.

I am mainly concerned with intraday pricing for equities only.

Thanks

I wouldn't average them out, but you could use the one that gives you a more conservative result. That way you have "extra room" there.

HV periods, again you can compare different ones to get a feel for what's been going on.

Moreagr · Mar 16, 2005

Thanks, MTE i have been using IV as my variable.. so i check HV out and see if it works better.

MTE · Mar 16, 2005

Quote from Moreagr:

Thanks, MTE i have been using IV as my variable.. so i check HV out and see if it works better.

By the way, I always use IV as well. It is what the market expects so who am I to question that!

Profitaker · Mar 17, 2005

delta is usually very close to the probability

How close depends on the volatility and time to expiry. It's close enough for fairly low volatilities and near time options. But becomes less accurate as volatility increases and time to expiry increases.

The definative probability that an option will expire ITM is N(d2) of the BS model and is known as the "probability to be called".

The other thing to bear in mind when / if using a delta as a probability, is that it's using the option IV as the future stock volatility in the probability calculation. That may or may not be a correct volatility.

dont · Mar 17, 2005

Quote from xpsyuvz:

petefern,

Actually that calculator was pretty much what I'm looking for, so thanks.

For anyone interested: I also found another calculator here:
http://www.hoadley.net/options/barrierprobs.aspx
(Unfortunately it only let's you calculate a few times per hour -- as its only a demo.)

I noticed that the two calculators give quite different values for the "probability of touching a barrier at any time during the period". I think the hoadley one is more accurate -- as I believe this probability should be about double the "probability of finishing above the target". (The optionvue gave me numbers that seemed way too high.)

bundlemaker,

Yeah, I guess a "single" formula would be too easy...

That auction market theory stuff sounds interesting - I'll have to look into that.

The hoadley stuff is good its only about USD50