The probability calculator utilizes the Black Scholes formula (Nobel Prize winners in Economics). The formula indicates (in terms of percentage) the probability of any market moving from its present price, "Stock Price" to another price, "Strike Price" within a defined period of time.
When an option is ATM ("at-the-money"), the chances are 50% that a market will go up, and consequently, a 50% chance that it will go down. So, any OTM ("out-of-the-money") option must have less than a 50% chance of being reached. The farther away the option is OTM, the lower the probability of it being reached within a certain time period. Conversly, any ITM ("in-the-money") option must have greater than a 50% chance of being reached. The further the option is ITM, the higher the probability of it being reached within a certain time period.
The above Probability Calculator can be used to determine whether the probability of a potential trade is favorable or not based on a normal distribution. This is also useful when comparing two or more different positions.
To use the Probability Calculator, the following inputs must be entered:
Stock Price - The current price of the underlying security that is being analyzed.
Strike Price - The share price that the underlying security can be purchased (Call Option) or sold (Put Option) by the option holder upon exercise of the option contract.
Volatility - Measures the underlying asset's absolute price movement.
Expiration Date - Option's are wasting assets which have defined dates of expiration. They are usually the third Friday or Saturday of every month. The Expiration Date link will provide you with an expiration calendar.