Stock Options Trading

When a trader is able to establish volatilty for stock options trading he can then use this to calculate probability.

Since volatility is defined in terms of standard deviation, it allows us to create a formula. That formula allows us to measure price swings and apply properties of statistics that can be used to calculate probability which in turn will be useful to us for stock options trading. Of course volatility is also used to calculate an options price, volatility is part of the pricing model.

But we are not going to use volatility as a pricing model we are more interested in voaltility to calculate probability for stock options trading.

In simple traders language we are going to use volatility to calculate the probability or the likely hood of a options price movement.

These are inherent statistical formulas that rea used by most large investment firms and insurance companies to calculate their risk and rewards.

Now we introduce the normal distribution curve, or the bell curve, any one familiar with statistics would be familiar with the bell curve.  So how is this of use to a trader who is trading in stock options trading?

Standard Deviation will help us to see at a glance where the future price of an option would be at a given time based on the volatility of that option. Therefore “0″Standard Deviation would stand for the current market price. We put all this to use when mapping out the bell curve.

In stock options trading having this, will help us to find out how far different market future prices will be from the current that is “0″.

Remember that Volatility defines the range to minus or plus one standard Deviation. What this does now is simply tell us where the future of a price will be and that is represented by the area of the bell curve to a minus or plus.

So if a trader after inputting the daily prices and then established volatility was to get a standard deviation over 1 then the likelyhood of that price movement occurring would be very high this would indeed be a good proposition for stock options trading system to be implemented.

For your reference.

Υ = 1 over √2π * χ 2 divided by 2, where χ = Standard Deviation. For a more elaborate formula reference.

Stock Options Trading