I've been playing with SamoaSky's option oracle software, http://www.samoasky.com/ It gives probability values for stats via different strategies. Does anyone know how they calculate the probabilities? thanks, -Rocko

e.g. IBM (Last Price $110.90) Long call 100 Sept. 2007 Maximum Profit Potential Infinity Maximum Loss Risk Probability: 11.48 % Amount-:1,225.70 Upper Breakeven @112.26 Proability: 44.39 % Amount: 0.00 Return if Striked @ 100.00 Probability: 11.48 % Amount: -1,225.70

Max loss probability is simply the probability of the option expiring OTM, i.e. the stock settling below 100 at expiry. Similarly, the probability of hitting breakeven - i.e. the probability of the stock expiring at or above 112.26. You have stock price, time to expiry and volatility, hence you can calculate the probability of the stock hitting various levels. Thinkorswim gives a prob. of 13% for the stock to expire below 100 and 44.43% for the stock to expiry above 112.26.

try creating a prob distribution with mean 110.9 and stdev as 10.037= 28.29/sqrt(256/30) , i grabbed 28.29 from ivolatility website. then do a cum dist function at 112.26. the 11% looks like a 1-delta