Probability of market moves from option prices
From the real market prices of vanilla options at a given expiry one can calculate the probability of the underlying being higher or lower than a certain level on expiry date ("cumulative probability"). They are meaningful and tradable as long as the prices for the options are tradable - no fancy modelling is needed.
An investor (or speculator) can trade (or bet) against them in several ways, from straightforward spreads of listed options to using structured products: in fact the investment case for some of the latter relies on the fact that most investors would attach far lower probability to large downward moves over the long term than the option market does.
Below we show approximate examples for 3 major indexes, together with the reference spot price and date of calculation. The degree of accuracy is typically worse at longer maturities and larger moves
Contact us to discuss further, or, if interested in detailed training, check these courses: SP or Vanilla.
Probability of move up or down as priced by options markets
| SPX | 2112.93 | 23-Apr-15 | ||||
| years | -50% | -20% | -10% | 10% | 20% | 50% |
| 0.5 | 0.4% | 6.1% | 16.1% | 9.5% | 0.0% | 0.0% |
| 1 | 1.8% | 13.1% | 24.3% | 27.3% | 3.3% | 0.0% |
| 3 | 9.3% | 27.9% | 37.6% | 38.3% | 26.0% | 4.0% |
| 5 | 17.6% | 36.7% | 44.4% | 39.3% | 31.5% | 13.2% |
| Eurostoxx | 3715 | 24-Apr-15 | ||||
| years | -50% | -20% | -10% | 10% | 20% | 50% |
| 0.5 | 0.6% | 10.5% | 24.6% | 19.8% | 3.4% | 0.0% |
| 1 | 2.0% | 17.4% | 30.8% | 28.9% | 11.5% | 0.1% |
| 3 | 9.6% | 35.8% | 47.8% | 29.2% | 20.3% | 5.9% |
| 5 | 17.8% | 45.8% | 55.6% | 27.6% | 21.1% | 9.1% |
| FTSE100 | 7087 | 24-Apr-15 | ||||
| years | -50% | -20% | -10% | 10% | 20% | 50% |
| 0.5 | 0.3% | 6.4% | 17.5% | 10.2% | 0.6% | 0.0% |
| 1 | 1.5% | 12.8% | 25.8% | 20.1% | 4.0% | 0.0% |
| 3 | 9.3% | 30.3% | 42.6% | 28.4% | 16.7% | 2.6% |
| 5 | 17.8% | 40.3% | 50.5% | 29.0% | 20.7% | 6.5% |
Disclaimers: the numbers above should be read for research purposes only, are approximate and indicative, and do not constitute a solicitation to invest, trade or speculate in any financial product.