Option Trade Outcome Percentile Chart
The Outcome Percentile Chart provides an alternate view of a trade - one that shows the probability of various P/L scenarios, rather than plotting P/L against price as seen in the risk chart.
From the risk chart, you can launch this screen from the menu (select button). When you first launch, it will ask you how many trades you want to simulate. The default is 100,000, which will run in a few seconds on any reasonably modern PC. When the simulation completes, it will show you a view of outcomes and probabilities that provide a useful, alternate view of the trade.
To illustrate, let's begin with a risk chart for a covered call:
For a risk chart like figure 9, it's fairly easy to understand the probability of various outcomes: the value of the trade increases with the price (subject to a maximum gain), and you can use the flyover behavior to see the probability of closing at or above a given price.
Despite the simplicity of the chart, however, it's difficult to answer the question: what is the chance of a successful trade? You know that the outcomes in the middle are more likely, but the range and probability of outcomes is still not entirely clear. The Outcome Percentile Chart helps clarify the view.
The calculator generates the Outcome Percentile Chart by simulating a large number of price paths, and plotting the resulting probability of the outcomes. Here is the Outcome Percentile Chart for the same trade shown above:
In figure 10, the Y axis shows the Profit/Loss of the trade, while the X axis shows the percentile distribution of the outcomes. We see, for example:
- The breakeven point, P/L = 0, occurs at around the 35th percentile. That is, 35% of price paths end up below breakeven, and 65% above breakeven. There is a 65% probability of breakeven.
- The trade reaches its maximum P/L at around the 51st percentile. That is, 51% of paths end up below maximum P/L, and 49% end up above. There is a 49% probability of reaching the maximum P/L.
If you compare these results to the risk chart, you'll see that they correspond closely to information you can learn from that chart - but the data is organized around probabilities rather than prices.
As you move the mouse over the plot, you can see more details about the points on the plot:
Finally, the scrolled text area at the bottom displays details about the trade and some useful statistics from the simulation:
- Mean price
- The average closing price of all the simulated price paths.
- Mean P/L
- The average profit/loss resulting from all the simulated price paths.
- Probability of breakeven
- The probability that the trade ends up with P/L of 0 or greater.
A More Complex Trade
In the first example, we learned information from the Outcome Percentile Chart that could almost as easily be learned by studying the risk chart. To better illustrate the power of the Outcome Percentile Chart, let's look at a more complex trade - a calendar spread:
The calendar call spread shown in figure 12 has two breakeven points, a sharp peak at the maximum gain, and a sharp P/L dropoff within one standard deviation of the peak. What is the probability of success with this trade?
The outcome percentile chart provides a view that helps answer that question:
Despite the sharp curves in the risk chart, the outcome percentile chart shows a fairly smooth relationship between P/L and probability of outcome.
Understanding the Full Trade
But something is missing from the most recent example. We've studied the trade up to the first option expiration. Then what happens?
Studying the trade beyond the first expiration requires making some assumptions about what happens when the option expires. The result of these assumptions cannot be represented in a risk chart, but can easily be shown in the Outcome Percentile Chart. To learn more, visit the documentation on Analyzing the Full Trade.
Menus
The outcome percentile chart offers the same and menu choices found in the risk chart.
What is this Simulation Actually Doing?
Please read the Theory of Operation for more detail about the math behind the option risk calculator.
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DISCLAIMER: This risk calculator is for educational purposes only, and is not intended as a basis for trading decisions. Use at your own risk.