Probability of touch is a measure of the likelihood of a stock or index being above or below a particular price at any time between now and a specified date. This number is only concerned with the probability between now and expiration, not where price will be on expiration.
The more time remaining in the life of the option or the greater the volatility in the stock, the wider the range will be for probability of touch. Conversely, decreasing time or volatility also decreases the probability of touch.
For example, suppose the July 33 calls for XYZ have a 15.13% probability of touch. This means that there’s only a 15.13% likelihood that XYZ will reach $33 at any time between now and July expiration. For August, the probability of touch is higher (30.91%) because there is more time remaining until expiration and higher implied volatility (25.96% vs. 23.53%) than there is for July.
Probability of touch is different than probability of expiring.
Return to the main trading glossary page to learn more terms.
