[R-SIG-Finance] Computing stop probability
Michael Weylandt
michael.weylandt at gmail.com
Wed Nov 25 02:23:57 CET 2015
On Tue, Nov 24, 2015 at 6:31 PM, Nick White <n-e-w at qtradr.net> wrote:
> You might want to check out the derivation of the Thorp /
> Black-Scholes-Merton formula as it deals with essentially the same
> concepts...
>
> On Wed, Nov 25, 2015 at 11:27 AM, Ernest Stokely <wizardchef at gmail.com>
> wrote:
>
>> Maybe a naive question but given the price and SD of an asset, is there a
>> way to calculate the probability of hitting a stop set at X over the next N
>> days? I know making appropriate assumptions, this is a Wiener process but
>> can't find the correct equation.
>>
>> A) Is there a closed form solution for this?
>> B) Is there an R function related to this?
>>
Black-Scholes (and stochastic volatility extensions) can give you a
probability of hitting a price under the equivalent martingale measure
("Q") but that can be pretty far from the "real-world" ("P")
probability of the same event happening. Or it may be close, depends
on your market.
If you don't want to do the math (it really is easy though -- half a
page at most), the relevant delta is decent approximation.
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