Probability Density

Probability density is a function that describes the likelihood of a continuous random variable taking on a specific value. In finance, it represents the probability of an asset reaching a certain price level at a given time.

By integrating this density function, traders can determine the probability of a position landing in a specific range. It is the fundamental building block for calculating expected values and assessing the risk-reward of an options strategy.

Understanding how density functions shift with market news or volatility changes is key to advanced trading. It provides a complete map of all potential outcomes for a financial instrument.