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How is Probability of expiring on TOS calculated?

Discussion in 'Options' started by eldorado1, Jan 24, 2012.

I couldn't find any insight on this feature (Analyze>Risk Profile)
Does anyone know if they use Beta? or only Implied Volatility?

thank you

Bob

3. Martinghoul

I am sure it's the good ole Reiner-Rubinstein closed form formula (based on their 1991 paper). You should be able to find it in Haug's "Complete Guide to Option Pricing Formulas" (section 2.8.6 of the 2006 edition).

EDIT: sorry, this is actually the TOS probability of touching I am thinking of. Probability of expiring ITM is simpler and can be found in the same book.

4. newwurldmn

I remember why this was discussed so avidly before....

5. bc1

I've run a bunch of them on tos and prob of expiring is always within a point of 1 minus delta. Probability of touching is always within a point of 1 minus (two times delta). I just keep an eye on delta now which is close enough for government work.

6. Martinghoul

Indeed...

I'll explain what I'm trying to figure out: I was scanning for iron condors on the TOS desktop and was not sure if I should trust the percentage figures under "probability of expiring" (which can be a scan criteria as well) or perhaps I should use another formula I thought of: price * beta / sum of points in profit zone (when it equels a smaller number then the higher the probability to profit)

Although beta actually compares risk I think I will stick to TOS's probability of expiring because I see Implied Volatility (which is used for it) is reliable even when using it to compare risk of different securities (e.g iv's GLD>SPY>FXE) and also beta of SLV and NFLX - senseless (as this post? I hope not) while their iv's are looking right even when You put them side to side with other stocks' iv's.

8. Martinghoul

You're not HowardCohodas by any chance?

9. newwurldmn

It's all circular unless you have some reason to believe the probability implied by the options is wrong via fundamental or technical analysis.

10. Martinghoul

Moreover, one should never forget to include the "risk-neutral" qualifier when talking about all these probabilities.

#10     Jan 25, 2012
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