How to find the probability of touching between two dates

This is a discussion on How to find the probability of touching between two dates within the Futures & Options forums, part of the Markets category; I'm trying to figure out how to calculate the probability of a stock touching a certain price target specifically between ...

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Old Nov 13, 2011, 8:57am   #1
 
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How to find the probability of touching between two dates

I'm trying to figure out how to calculate the probability of a stock touching a certain price target specifically between two dates I choose, without it being touched before.

For example, suppose I want to find the probability of a stock price touching some out the money target next week between Wednesday to Friday, without ever touching that target anywhere between now to Wednesday. How do I do it?

Anyone has an idea?
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Old Nov 13, 2011, 11:16am   #2
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Re: How to find the probability of touching between two dates

You might be able to guess this but I don't think I'd go so far as to say 'calculate'. Maybe there is another way to where you want to be - why do you want to be able to do this?
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Old Nov 13, 2011, 6:46pm   #3
 
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Re: How to find the probability of touching between two dates

Socratic started this thread I think there should be something more than just guessing about it (given we assume certain value for future volatility) just as we can calculate the probability of touching somewhere between the current date and a future date as here:

Monte Carlo Option Probability Calculator | Option Trading Probability Calculator

The reason for getting the right idea about probability is because the time when a price reaches a target may make a big difference as to whether your options position is profitable or not.
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Old Nov 13, 2011, 9:50pm   #4
 
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Re: How to find the probability of touching between two dates

If you have a few option prices for the two maturities, you may be able to calculate the *risk-neutral* probability of touching (under a variety of assumptions).
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Old Nov 13, 2011, 10:33pm   #5
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Re: How to find the probability of touching between two dates

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Originally Posted by Socratic View Post
I'm trying to figure out how to calculate the probability of a stock touching a certain price target specifically between two dates I choose, without it being touched before.
Last decade or so there always seems to be a short squeeze put in play by the invisible hand. Typical gambit is currency manipulation and sovereign devaluation right around option expiration time by Central Banks and so called Economic Advisory Boards known affectionately as the PPT.

You'd have to monitor the tick and / or review intraday histories to avoid the trade after the designated high or low water benchmark was "touched".

Sounds similar to so called stop loss floor strategies that trading systems based on optimized "back test" models use.
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Old Nov 13, 2011, 10:39pm   #6
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Re: How to find the probability of touching between two dates

Well, yes, that's just what I was about to say.
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Old Nov 13, 2011, 11:02pm   #7
 
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Re: How to find the probability of touching between two dates

Socratic started this thread Martinghoul: right, I can calculate the probability of touching at some point in between now and the the nearer date and I can calculate the probability of touching at some point in between now and the farther date. Yet what I want to calculate is the probability that the touching does not take place before the nearer date yet does take place sometime in between the two dates.

Cadavre: It seems very complicated to do back-testing on complicated strategies, all the more so when the historical options prices aren't all available. What I need I guess is some mathematical formula or computer modeling designed to give probabilistic answer to such a question, much like the link referred to above purports to do.
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Old Nov 13, 2011, 11:45pm   #8
 
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Re: How to find the probability of touching between two dates

I've probably misunderstood what you're trying to do, and the assumptions. If you know what the probability of it hitting before time T, then you also know the probability of it not hitting by that time. So if you know the prob of it hitting before T+whatever, and it not hitting before T, don't you already have the info you need?
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Old Nov 14, 2011, 12:31am   #9
 
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Re: How to find the probability of touching between two dates

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Originally Posted by Socratic View Post
Martinghoul: right, I can calculate the probability of touching at some point in between now and the the nearer date and I can calculate the probability of touching at some point in between now and the farther date. Yet what I want to calculate is the probability that the touching does not take place before the nearer date yet does take place sometime in between the two dates.
I think Shakone has beaten me to the punch here.
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Old Nov 14, 2011, 1:19am   #10
 
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Re: How to find the probability of touching between two dates

Socratic started this thread
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Originally Posted by Shakone View Post
I've probably misunderstood what you're trying to do, and the assumptions. If you know what the probability of it hitting before time T, then you also know the probability of it not hitting by that time. So if you know the prob of it hitting before T+whatever, and it not hitting before T, don't you already have the info you need?

Yes, both the probabilities "not hitting before T" and "hitting before T+whatever" are known. Yet I can't just multiply the two, because the events are not independent. Whether or not it hits by T has a probabilistic effect on whether or not it hits by T+whatever. If it hits by T the probability of it hitting by T+whatever is 1, and if it doesn't hit by T then the probability is unknown to me: sometime not hitting means it went far away from the target and sometimes it means it used the time to approach the target.
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