Probability Cone Application by Peter Hoadley

www.hoadley.net/options

|||||

Outputs

Software Environment

Download

Probability Cones

Overview

The probability cone application can be used to provide a visual indication of the probable ranges of future asset prices and to dynamically model the impact on these prices by changing assumptions regarding volatility, expected return and time.

The width of the cones at any point in time -- ie the range of underlying asset prices -- is heavily dependent on the underlying asset's volatility. The more volatile the underlying prices, the wider the expected range of future prices and hence the wider the cones.

This information can help options traders select the most appropriate strategy based on their view of future volatility and/or future price direction.

Outputs

Probability cones are shown graphically, and also in tabular form.

Probability bands can represent either "end of period" probabilities or "any time" probabilities (as in the above example). "Any time" probability cones are particularly useful for evaluating strategies on American options or barrier options which may be knocked in or out at any time during the term of the options.

Software Environment

The Probability Cone application will run on versions of Microsoft Excel 2002 and above on Microsoft Widows 2000 or above.

Download the Probability Cone Application

The Probability Cone application is free but requires the full version of the Hoadley Finance Add-in for Excel. The Probability Cone application is included with the full version of the Add-in and does not need to be downloaded separately.