How to Add Options Probabilities

Bard · Fri, 29 Oct 2021 17:30:00 +0000

Hi there, I was hoping a math expert here could tell me if it’s possible to add two probabilities when the probabilities are dependent? I assume they are from the way the Black Scholes option formula prices Calls and Puts, — where the value of the Call option (its premium) will go up (if the market rises and volatility changes) whilst the value of the Put option will go down)? What I have downloaded is an Excel Options probability calculator — pls see screenshot and Excel attachment. I don’t or can’t get the last table to do anything and don’t think it works? The Dow Jones price ranges (option Strikes) represent going short to open a Call (bearish, with the higher Strike, Dow 37,080) and going short to open a Put (bullish, with the lower Strike, Dow 34,000). The Short Strangle’s strategy objective is for the Dow to stay within the higher and lower Strike ranges (think of a dog with a vet cone around its head but in reverse!) and for the options to expire worthless (so you can close the trade out and buy the options back for less or zero and profit in the difference between the total premiums for the short Call and Put and the final contract (or earlier) option buy (closing) price. So is it possible (or wise) to add the two event probabilities and get a final total probability, which I think the last table in the Excel calculator was supposed to produce? Cheers, for any thoughts or input, Best, Bard

This topic has 51 replies, 5 voices, and was last updated 4 months ago by Nicolas.

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01/19/2022 at 9:37 PM #185980

gabri

Yes, I got that, but where are they coming from? Is the first time I see those formula. Is there some text you got the formula from? It is just to understand better

gabri
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01/19/2022 at 9:40 PM #185982

JS

Was the calculation tool of Bard, better ask him…

JS
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01/19/2022 at 9:48 PM #185985

JS

In general the calculations come from the normal distribution…where the standard deviation is the difference between the current price and the target price.

JS
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01/19/2022 at 9:54 PM #185987

gabri

That is clear. I was just unsure if a standard bell curve was used or if the baseline was the real curve withe the calculated skewness of the underlying. Now is clear, thanks

gabri
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01/19/2022 at 10:25 PM #185989

JS

Do you want the calculation of the example?

JS
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01/19/2022 at 11:14 PM #185995

JS

Volatility: 17%

Days to expiration: 21

Current price: 35805

With a volatility of 17% and after 21 days the price difference is: 35805 x 0,17 x SquareRoot(21 / 365) = 1460

Difference between current and (upper) target price: 37080 – 35805 = 1275

Difference between current and (lower) target price: 35805 – 34000 = 1805

1275 / 1460 = 0,87 cumulative distribution = 80%

1805 / 1460 = 1,24 cumulative distribution = 89%

JS
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07/26/2024 at 7:12 AM #235799

Nicolas

Some of the calculation statistics discussed in this topic will be making their way into the all-new options module (still a work in progress) that will be embedded in version 13 of ProRealTime. Stay tuned for more updates! 😉

Nicolas
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