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What is Calculating Options Implied Probabilities about?
The implied probability distribution derived from option prices using an interpolated volatility surface represents the risk-neutral probability of different stock price outcomes. By pricing overlapping butterfly spread strategies at different strike prices, the probability of the stock ending within the strike range can be calculated as the butterfly cost divided by its payout. Taking many small, overlapping butterflies across all strikes and calculating their costs produces a smooth implied probability di
- Author
- Asinth Sanjo
- Language
- EN