User-defined Probability of Profit reflects the user’s expectations of the future price of the underlying at expiration, and how volatile the underlying will be up until expiration. The Options Wizard allows the user to enter data reflecting her outlook on the future price, volatility, and also the time horizon of the underlying security. Using this data, the wizard presents a set of standard strategies that you can filter by aggressiveness, Probability of Profit, Max Gain and more. Additionally, these user-defined values are used to create an alternative Probability of Profit to the Market-Implied version, and drive the data in the Distribution Graph:
- If the user’s forecast is that the future price of the underlying security is greater (or less) than what the market expects, the distribution graph used in the calculation will be shifted farther to the right (or left), relative to the market-implied distribution.
- If the user’s forecast is that the future price volatility of the underlying security will increase (or decrease), then the distribution graph used in the calculation of probability of profit will be wider (or narrower) relative to the market-implied distribution.
Choose between Market Implied Probability of Profit and User-Defined Probability of Profit (based on your forecasts) in the Filters section of the Options Wizard.
This article may contain links to third party websites and information, which are provided for educational purposes only. The broker does not warrant or in any way guarantee any third-party information that is provided. All links and information therein are subject to change. Probability of Profit is a mathematical expression based on accepted industry options pricing and statistical distribution models. Probability of Profit is for informational purposes only and is not a recommendation. Probability of Profit does not consider any individual investor’s financial profile, investment objectives, or other factors that would typically be used when making recommendations. The Probability of Profit calculation does not include fees or commissions.
Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” that you can find on the OCC website.