Market Expectations Map
Market Implied Probability Map
Our heatmap estimates spot price probability distributions at various points in the future, as implied from options prices. These probabilities may provide additional insights into market sentiment and help clients make more informed trading decisions.
How It Works
Option implied probabilities are not directly observable but are inferred using mathematical models based on several factors:
Current Spot Price: The current market price of the underlying asset.
Strike Price: The price at which the option can be exercised.
Time to Expiration: The remaining time until the option's expiration date.
Interest Rates: The prevailing interest rates which can impact the cost of carry.
Volatility: The expected volatility of the underlying asset over the life of the option.
These models assume that option markets operate on arbitrage-free principles, such as covered interest rate parity. This principle suggests that expected forward exchange rates should counterbalance interest rate differences. However, this may not always hold true, so consider this when making your decisions.
Interpreting the Map
In our heatmap, colours signify different implied probability levels for spot prices and expiration dates:
Shades of Green: Indicate higher probabilities of the asset's price exceeding the stated level.
Shades of Red: Indicate lower probabilities of the asset's price exceeding the stated level.
Colour Intensity: Corresponds to the strength of the implied probability.
The heatmap provides a visual representation that makes it easier to understand market expectations at a glance. Here's how to interpret it:
Green Areas: These areas suggest that the market believes there is a higher likelihood that the asset's price will be above the specified level at a given future date. The darker the green, the higher the probability.
Red Areas: These areas indicate that the market believes there is a lower likelihood that the asset's price will be above the specified level at a given future date. The darker the red, the lower the probability.
Gradient Shading: The gradient shading helps to visualize the transition of probabilities across different price levels and timeframes. A smooth transition from green to red indicates a range of probabilities, while sharp transitions can highlight significant market sentiment changes.
Practical Applications
Informed Trading Decisions
By analyzing the heatmap, traders can gain insights into market sentiment and make more informed trading decisions. For example:
High Probability Areas: Consider strategies that benefit from price movements into high-probability areas.
Low Probability Areas: Use these insights to hedge positions or avoid trades that rely on low-probability outcomes.
Risk Management
The implied probabilities can also aid in risk management by highlighting potential price movements and volatility. This helps in adjusting positions to manage risk more effectively.
The Market Expectations Map is a powerful tool designed to provide insights into market sentiment through the lens of option-implied probabilities. By leveraging this tool, you can enhance your trading strategies, manage risks more effectively, and navigate market uncertainty with greater confidence.
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