# Probability Envelope

A probability envelope uses historical option data and a proprietary statistical formula in order to graph the potential range of future stock prices. The range defines where stock prices are likely to be within a specific period of time. By default the expected range is set to 68% (similar to two standard deviations).

## Probability Envelope in Practice

The probability envelope displays an arc which is created based on user define inputs. Vertical lines are also present on the chart to represent the option expiration dates. This allows you to combine the knowledge of an expected price range based on statistical data with time series data to estimate the probability that your option trade has the potential to be in the money by expiration and theoretically its value.

For example, if we look at an option two expirations from now we can see that the there is an 68% chance the price of the stock at expiration would be between \$44 and \$42. Option buyers with the intention of holding until expiration would typically want to avoid buying strike prices outside of the indicated range due to the high likelihood they would expire worthless. Conversely, those traders looking to sell options would find it to their benefit to sell options outside of the indicated range.