Discussing the article: "From Option Chain to Risk-Neutral Density: The Market's Own Probability Distribution"
Animated images are evil (inconvenient, hard to percept, the animation itself does not add any value - all of these applies specifically to the article animations, not to animations in general, when they make sense). Why not to publish every image as a static one with the whole information freezed at the last frame?
Stanislav Korotky #:
Animated images are evil (inconvenient, hard to percept, the animation itself does not add any value - all of these applies specifically to the article animations, not to animations in general, when they make sense). Why not to publish every image as a static one with the whole information freezed at the last frame?
Animated images are evil (inconvenient, hard to percept, the animation itself does not add any value - all of these applies specifically to the article animations, not to animations in general, when they make sense). Why not to publish every image as a static one with the whole information freezed at the last frame?
Never heard someone call animated images evil, but I get your point. A GIF cannot be paused, rewound or zoomed, so if you miss a step you are waiting for the loop to come round again.
Where I would push back is the idea that the motion never carries anything. In the butterfly figure the point is the sweep across strikes, and in the pipeline figure it is the order the stages happen in. A single frame shows the result but not the sequence, and the sequence was the thing I was trying to teach.
That said, some animations are cumulative so the final frame does hold the full picture, and publishing a static version of it instead of the sequence is a better option. Thanks for the advice.
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Check out the new article: From Option Chain to Risk-Neutral Density: The Market's Own Probability Distribution.
The article builds an MQL5 indicator that recovers the risk-neutral density from an option chain via the Breeden–Litzenberger identity. Quotes are inverted to implied volatilities, the smile is smoothed and priced back to arbitrage‑free calls, and the second derivative yields the density. The tool reports probabilities above any level, the expected move, skew and kurtosis, and overlays the realized-return distribution for comparison.
Two of the previous tools in this options series read the market from the outside in. The implied-volatility surface showed the price of risk, strike by strike and expiry by expiry. The dealer gamma-exposure map showed where hedging flows pin or accelerate price. Both are indispensable, but both stop just short of the question traders care about most: what odds the market assigns to each possible finish level of the underlying. An implied volatility of 22% and a downward skew tell you the market is nervous about the downside, but they do not tell you the probability that the index closes above 5,800 in a month, or the range it expects to stay inside, or how fat the left tail really is. Those are questions about a probability distribution, and the option chain contains that distribution in full. This article extracts it.
The result is called the risk-neutral density. The MQL5 indicator built here reads an option chain (from a CSV file or the broker's native option symbols), fits a smooth volatility smile, applies the Breeden-Litzenberger identity to turn call prices into a density, and draws it on the chart. From it, the tool reads off the probability of finishing above any level, the implied expected move, the implied skew and kurtosis, and a set of confidence bands. It then overlays what the underlying has actually done over the same horizon, so the gap between the two, the risk premium, is there to read.
One honest note up front, because it shapes the design. The density is recovered from option prices and therefore requires an option chain. The realized-return overlay it is compared against is computed from the underlying's ordinary price bars and requires no options. As with the earlier tools, a retail MetaTrader 5 account often carries no option symbols, so the indicator ships with two data paths: a native provider for accounts that do have options, and a CSV provider that runs on any account, fed by a sample chain we generate. Everything the tool computes is only as real as the chain you feed it, and we are explicit about that throughout.
Author: Muhammad Minhas Qamar