This is in fact a common catchphrase used by some brokers to recruit new options buyers. This is why it is so important to learn how to use a probability calculator early in your options trading career.

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There is more than one website where traders can get free versions of this type of software, called Monte Carlo Probability Calculators. What this does is, given the price and the volatility of the underlying asset and the expiration date and strike price s of the option s , calculate the probability of certain events taking place, e. In this example one would therefore enter the current price of the underling under Asset Price. Then enter the Expiration Date of the option in the appropriate field.

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The Volatility is usually provided by the broker and should go into the appropriate field. When one clicks on Calculate the programme calculates the rest.

The most important result here for the options buyer and seller is the percentage probability that the price will close beyond the upside call options or the downside put options.

In this example there is only a 5. There is more to this than it seems though.

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What is very important to remember, especially for options sellers, is that the trade has to be managed. It is therefore also important to look at the possibility that the price would ever exceed the strike price to the upside or downside without necessarily expiring beyond that level. The options seller might therefore have to buy back the option at a loss more often than expected, because once the price of the underlying asset exceeds the strike price the option is ITM and it could be exercised.

Marcus Holland - Marcus Holland has been trading the financial markets since with a particular focus on soft commodities. He graduated in from the University of Plymouth with a BA Hons in Business and Finance. Will not be published Required.

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Home Trading for Beginners Commodities ETFs Silver Gold. Sat, Dec 8th, Options By Marcus Holland. The result will look something like fig. A point to ponder There is more to this than it seems though. About the Author Marcus Holland - Marcus Holland has been trading the financial markets since with a particular focus on soft commodities. Managing an open options position.

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