probability distribution formula?

Discussion in 'Options' started by xpsyuvz, Jan 25, 2005.

  1. Crevalle

    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%
     
    #21     Mar 16, 2005
  2. Moreagr

    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
     
    #22     Mar 16, 2005
  3. MTE

    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.
     
    #23     Mar 16, 2005
  4. Moreagr

    Moreagr

    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
     
    #24     Mar 16, 2005
  5. Crevalle

    Crevalle

    Ahh...thanks for the correction. I was under the wrong impression.
     
    #25     Mar 16, 2005
  6. MTE

    MTE

    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.
     
    #26     Mar 16, 2005
  7. Moreagr

    Moreagr

    Thanks, MTE i have been using IV as my variable.. so i check HV out and see if it works better.
     
    #27     Mar 16, 2005
  8. MTE

    MTE

    By the way, I always use IV as well. It is what the market expects so who am I to question that! :p
     
    #28     Mar 16, 2005
  9. 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.
     
    #29     Mar 17, 2005
  10. dont

    dont

    The hoadley stuff is good its only about USD50
     
    #30     Mar 17, 2005