Options Implied SPY Price Probability Ranges And Valuation

Individual options traders place their bets on the direction and magnitude of price change for securities. The volatility implied in the price of an option is the basis for projecting the trader’s price probability assumptions.

Because there is a buyer and a seller on each side of a trade, options volatility data is agnostic as to direction. You need to use other tools to decide whether up or down is more likely, but the options can tell you a lot about expectations as to magnitude of change.

This table shows (as of this morning 2013-02-20) the probable price ranges for SPY the S&P 500 proxy) through the April expiration and the January 2014 expiration, and also the implied dividend yields and P/E multiples that would result from those prices, based on current dividends and earnings.

There is a lot more to think about than just this, but it is an interesting window to peer through and consider in the overall mix of data when thinking about market prospects.

It is important to note that options traders opinions change quickly and move around quite a lot, so this is a snapshot in time of fast moving opinions.

As of this morning, for example, traders saw a 10% chance of the price of SPY dropping to 142.78 by the April expiration and 129.40 by the January expiration. That January price level implies a dividend yield of 2.51% and a P/E of 11.80.

Similarly, they saw a 10% chance of the price rising to 164.38 by the April expiration, and 181.17 by the January expiration, for an implied yield of 1.79% and P/E of 16.52.

The 10% end points encompass the 80% probability range for prices.

This data was obtained using the tools provided by OptionsExpress.

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