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With Mike's and Clyde's thoughts in mind here is
some work I did on the TradeStation Probability Maps back in April 1999.
The objective was to modify the TS Normal Distribution Probability Map so that a
user could input a prospective implied volatility or he/she could use the VIX
when inserted in another data field, or IV from some other source either EOD or
realtime. Attached is the resulting .els and a .gif and below is the text
of the modifications. Constructive criticism is welcome. Those of
you experienced in such math may want to check the coding of the VolatilitySDev
line. The original line is {braced out} and the new line is below
it. Explanations for the inputs are in the header of the text.
Insert the ProbMap as is done with anyother indicator. It will begin on
the last bar of the chart. Then to relocate it you go to "Drawing" on the
menu bar and select "Probability Map". This activates a new pointer which
you then locate on the bar you want the Prob Map to begin on. By the way,
the name probability cones was popularized by Don Fishback and is also the name
used in MetaStock "ODDS Probability Cones". Parabola is mathmatically
correct per Mike.
enjoy,
BobR
<FONT face=Arial
size=2>{*******************************************************************Description :
Probability Map shows expected Normal Distribution of Prices based on implied
volatilityProvided By : Omega Research, Inc. (c) Copyright 1999
Modified by Bob Roeske April 16, 1999 <A
href="">http://www.oextrader.com/sigma_trader
email bobrabcd@xxxxxxxxxxxxx and
bobr@xxxxxxxxxxxxxxxx}
{Input definitions:VolatilityLength in the
modified code is the ratio of look-a-head days divided by trading days(252) in a
year or all days(365) in a year. For example use
VolatilityLength(30/252) for a 30 day lookahead using trading
days.
SD(#)= number of standard deviations for top and
bottom of the ProbMapND. SD(1) captures prices 68% of the
time.SD(2) captures prices 95% of the time. SD(3) captures prices 99.7
of the time.
VIX(c of data2) is to provide an implied volatility
input from your datafeed or from a manual inputwhen doing "what if" types of
studies. For example if you want to assume the market goes into a
nosediveand implied volatility rises to 50 then use VIX(50) instead of VIX(c
of data2).
PriceRows(#) determines the number of horizontal
lines in the map.
BarColumns(#) determines the number of price bars
used in the map. Format Window Bars to Right to "see" into the
future.
********************************************************************}
Inputs: VolatilityLength(30/252),SD(2),VIX(c of
data2), PriceRows(75), BarColumns(75);Variables: Count(0), PriceLevel(0),
RowHeight(0), MapTop(0), MapBottom(0), VolatilitySDev(0), Probability(0),
UseLog(True);
{VolatilitySDev =
StdDevSAnnualized(ExtremePrice(2,UseLog),VolatilityLength);}VolatilitySDev =
SD*(0.01*VIX)*squareroot(volatilitylength);
If CurrentBar>= 1 Then Begin
MapTop = Close + (Close *
VolatilitySDev); MapBottom = Close - (Close *
VolatilitySDev); RowHeight = (MapTop - MapBottom) /
PriceRows; Count = 1;
<FONT face=Arial
size=2> PM_SetLow(MapBottom); PM_SetHigh(MapTop); PM_SetRowHeight(RowHeight); PM_SetNumColumns(BarColumns);
While Count <= BarColumns Begin PriceLevel =
MapBottom; While PriceLevel < MapTop
Begin If PriceLevel < Close
Then Probability = ProbBelow(PriceLevel, Close,
VolatilitySDev, Count) *
100 Else Probability =
ProbAbove(PriceLevel, Close, VolatilitySDev, Count) *
100; PM_SetCellValue(Count, PriceLevel,
Probability); PriceLevel = PriceLevel +
RowHeight; End; Count = Count +
1; End; End;
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
<A title=MikeSuesserott@xxxxxxxxxxx
href="">MikeSuesserott@xxxxxxxxxxx
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Saturday, March 22, 2003 4:37
PM
Subject: [RT] Probability Cones and
QQQ
These probabilities play an important role in many an
option trader's dailyresearch. Let me add a few remarks here.As
you can see from Clyde's graphs, "probability cones" actually are notcones
but parabolas. The probable price projections n days into the futurevary
with the square root of n, which leads to curves of this type. So Iwould
prefer to call them "probability parabolas."Option traders usually
look at probability parabolas by way of some type ofspread sheet or
probability calculator. The idea is to answer theall-important question
about the future pricing of an option or optionspread. For this purpose,
we need to determine one important dependentvariable that goes into the
above equation, and that is the futurestatistical volatility of the
underlying. Since we cannot look into thefuture, we have to make do with
an estimate.It is, of course, entirely correct and legitimate to use
the currentstatistical volatility of the underlying for such an estimate,
as Clyde isdoing. However, there may be a better mouse trap.A
number of scientific studies suggest that under "normal" circumstances
thebest predictor of future statistical volatility is the current
impliedvolatility of the at-the-money options. ("Normal" meaning that the
impliedsare not at extremes, such as they were after 9/11.)The
option traders in the group might want to experiment with this idea.
Icertainly use it in my own trading. You will see that the
probabilityparabolas may then take on quite different shapes, leading to a
completelydifferent risk assessment for your positions. If you have access
tohistorical option prices you can also do your own research as to
theeffectiveness of implied volatilities in predicting prices.Best
wishes,Michael Suesserott> -----Ursprüngliche
Nachricht-----> Von: Clyde Lee(SBCY)
[mailto:clydelee@xxxxxxxxxx]> Gesendet: Saturday, March 22, 2003
17:36> An: swingmachine-list> Betreff: [RT] Probability Cones
and QQQ>>> I have shown you the price probability cones
on several different> occasions> indicating several different
ideas of their use.>> The attached is what cones are really all
about -- option trading.>> Here, on expiry date we calculate a
new probability cone based on the> standard deviation of price at that
time and the probability value> we wish to use to select the strike
prices for the credit spread of> selling a call option and a put option
at the strike indicated as being> "safe" on the next
expiry.>> This is not anything new and is well known by most
option traders.>> This is just to give those without this
exposure some idea of how> it is possible to make relatively safe
trades by selling puts and calls.>> Remember, NOT
GUARANTEED. There is risk (as the died in the wool> option
traders will tell you) but this is an approach that will allow you> to
lower your risk and indicate to you when you should "bail out" of> a
trade.>> An earlier version of this software (free) is
at:>> <A
href="">http://groups.yahoo.com/group/swingmachine/files/OMEGA_ELA-ELS_FOLDER/probra>
ng.ela>> Much credit for getting me interested in this goes to
BobR.>> Clyde>> - - - - - - - - - - - - - - - - -
- - - - - - - - - - -> Clyde Lee
Chairman/CEO (Home of
SwingMachine)> SYTECH
Corporation email:
clydelee@xxxxxxxxxxxx> 7910 Westglen, Suite
105 Office: (713)
783-9540> Houston, TX
77063
Fax: (713) 783-1092> Details
at:
www.theswingmachine.com>
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Attachment:
ProbMap.gif
Description: GIF image
Attachment:
Attachment:
Description: "Description: Binary data"
Attachment:
Description: "BR_PROBMAPND.ELS"
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