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 Forums ›› Main ›› Options ›› ThinkOrSwim's Probability OTM, ITM, of Touching Calculator

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 TskTsk   Registered: Dec 2011 Posts: 408 06-26-12 04:02 PM Quote from cactiman: If you're not a teacher already, you should become one! Mucho Gracias. Just a regular guy trying to help out Edit/Delete • Quote • Complain
 Kevin Schmit   Registered: Nov 2005 Posts: 597 06-26-12 07:49 PM Quote from TskTsk: 5 delta strikes ... statistically they should've been hit only 5/100 = 5% of the time. Delta is N(d1). The risk-neutral probability of expiring ITM is approximately N(d2). Since d2 is strictly less than d1 (by sigma*sqrt(T-t)), delta will always overstate the true risk-neutral probability. Edit/Delete • Quote • Complain
 Put_Master   Registered: May 2009 Posts: 1027 06-27-12 04:58 AM Quote from Kevin Schmit: Delta is N(d1). The risk-neutral probability of expiring ITM is approximately N(d2). Since d2 is strictly less than d1 (by sigma*sqrt(T-t)), delta will always overstate the true risk-neutral probability. Well duh! What's the point in stating the obvious? Talk about risk-neutral probabilities,... the end result of which, will be the obliteration of one's portfolio, mass hysteria, world wide flooding, and the end of civilization! http://www.flixxy.com/trumpet-solo-melissa-venema.htm Edit/Delete • Quote • Complain
 jamesbp   Registered: Sep 2006 Posts: 49 06-27-12 07:26 AM If you use an Option Model to calculate Probabilities, then it will suffer from the same limitations and caveats that ALL Option Models do ... but at least it will be consistent with all the other Greeks that the Option Model generates ... Espen Haug covers PROBABILITY GREEKS in his book 'Option Pricing Formulas' and suggests that the Greek he calls STRIKE DELTA can be interpreted as the discounted risk-neutral probability of the Strike ending up In the Money ... similar to the Delta Adjustment that Kevin mentioned above .... Back to the real world .... in practice, I use one of three methods as rough and ready approximations .... 1. The absolute value of Delta approximates to the Strike finishing ITM ... the shorter the time frame / the lower the Vol / the more accurate the approximation. 2. ATM Straddle Price x 1.25 approximates to 1 Standard Deviation Move 3. Max Loss / Strike Width % for a Vertical Spread approximates to the Strike finishing ITM Whereas 1. uses an Option Model ... 2. and 3. have the advantage of using Liquid Market Prices ... Hope that helps Cheers James Edit/Delete • Quote • Complain
 Trader13   Registered: Jul 2004 Posts: 184 06-30-12 10:04 PM I think the most interesting output is the probability of touch, which is approx TWICE the probability of the option finishing ITM. For example, if we assume the delta is approx the prob of finishing ITM, then a 30D option has a 30% chance of expiring ITM and a 60% chance of touching ATM during it's lifetime. Edit/Delete • Quote • Complain
 sgfee123   Registered: Oct 2012 Posts: 21 01-20-13 08:00 PM Trader13's statement: "probability of touch is approx TWICE the probability of the option finishing ITM" is a fairly accurate rule of thumb for Out-of-the-Money Options, but it does not apply very well for In-the-Money Options. proboftch.jpg This has been downloaded 102 time(s). Edit/Delete • Quote • Complain
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