Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
That's the confusing part. Usually if you are just buying an option you are looking for a directional move, which would be determined by your TA.
I seldom buy options, I sell options and base my stop (if used) on my R/R and backtesting results. When I do buy, I assume my max loss will be the debit paid.
I understand that is the way to calculate the stop loss (you are suggesting) and I understand it's up to me to be able to make the right read/prediction. But, what I'm asking is slightly different. I'm asking if there is a database, calculation, application that will analyze my option bought and calculate/track the probability of an investment return based on all the possible outcomes. ie. (you have x days left and if it goes up y you will make money, etc) I know its complicated and overkill, but I do have a use case for the data that will help me with analysis of when to sell my options.
1. Figure out expected movement in spot/underlying
2. Plug in values into option pricing model applicable to your expiry style, values corresponding to your traded strike price
3. In place of current market price plug in value of from point number 1. Example: Expected bounce of 30 points in underlying, then Current underlying price + 30 = Value you should calculate for
4. Option pricing model will give you expected CE/PE value at that expected underlying value for the given volatility/days to expiry/rate of return (all of these are adjustable)
5. How these mentioned entities effect the price is something you have to read under relevant greeks.
This exercise will give you payoff/scenario calculations along with good looking graphs of your traded strike for the "Expected movement in underlying".
There are lot of free calculator available, usually they are there on broker terminal too. You just have to plug in values in it and click calculate. You can also make them in excel or anything else that you may using with some advanced mathematical functionality. Google, you will find it somewhere for free as these are very basics, complicated is whole another ball game, there are people who have invented their own option pricing model on this very site.
Books worth reading if you are trading options and plan to stick to it:
Options, Futures, and other Derivatives - John C. Hull
Trust me, it will help in long run.
If this is not what you are looking for then forgive my ignorance, I'm sure expert sooner or later will help you.
There is no reliable way, the only reliable probability is the probability at open.
The analyze tab will provide you with information stated in other responses. However, it seems like you are asking for a program to decode the BSM pricing model and perform some AI with difference variables. --- It probably doesn't exist and if it did the big boy bankers would not share.
If you want an answer from an options research group that has been trying to figure out a simple way to assist when to get out of a trade, email the tastytrade research team. They have mentioned creating a variable like POP or P50 that would help you know when to get out of a trade. I think one of their emails is [email protected].
It does exist, its just that one of the variables, IV is not something you can just calculate as its "expected forward" movement. One of the reasons BS is used by everyone is due to it being one of the only popular pricing models that has only one such an input, others are measurable like time.
So, to be more precise, if you really want to get around and develop some kind of AI to "Predict option prices", your first step should be estimating Implied volatility. Note that I again use word estimate, so even if you managed to re-invented the wheel, it will be still just an estimate.
If you do decide and make any progress in that direction, I would love to hear it.
IV is a result of BSM, not an input. Its the one variable you don't have.
So you agree you can't calculate directional move with option pricing, but you still think there is a way to determine the of a direction move and the length of the move to determine its probability? Then your first step is to estimate IV?
Do you have any data or references to your view on this being available or is this a hunch?
Algo's that read tweets and news have been trying to predict for years, No individual will accomplish this before one of the big trading firms with funding for teams of mathematicians and data analysts.