Reading a probability cone
A probability cone is the range the market implies a stock could cover between now and a date, drawn as two widening bands: about 68 percent of outcomes inside the inner one, about 95 percent inside the outer. It is built from implied volatility, so it is a picture of what options cost rather than a forecast of what the stock will do.
Useful, once you know which of its claims to believe.
Building one
CSCO at $58.40, 28 percent implied volatility, out to the April 17 expiry. The width of the cone at any horizon is the price times the volatility times the square root of the fraction of a year, then applied as a proportional move rather than a dollar one.
| Date | Days out | 1σ band, 68% of outcomes | 2σ band, 95% of outcomes |
|---|---|---|---|
| March 18 | 15 | $55.18 to $61.82 | $52.14 to $65.43 |
| April 2 | 30 | $53.91 to $63.30 | $49.75 to $68.59 |
| April 17 | 45 | $52.95 to $64.46 | $47.99 to $71.11 |
Now put the trade on it. The short strike is $64. The top of the 1σ band at expiry is $64.46.
The strike sits just inside the edge of the inner band, which is the single most useful thing a cone tells a premium seller: a 0.20 delta short strike is, near enough, the 1σ boundary. Same fact, two vocabularies. If you have been picking strikes by delta and someone starts talking in standard deviations, you already know where they are pointing.
The square root, and why the cone is not a triangle
Time enters as a square root, not linearly. Fifteen days out the 1σ move is $3.31. Forty-five days out, three times as long, it is $5.74, which is 1.73 times as much rather than three times.
That shape has a direct consequence for expiry selection. Selling three consecutive 15-day contracts exposes you to a narrower band each time than one 45-day contract does, and collects premium three times. It also gives you three sets of commissions, three crossings of the spread, and three chances to be sitting on the wrong side of a gap. Cluster D works that trade-off out with the numbers.
The circularity
Here is the part that gets left out.
The cone was drawn using implied volatility. Implied volatility was extracted from the price of the very options you are trying to evaluate. So when you draw a cone, notice that the $64 strike sits outside the 1σ band's most likely region, and conclude that selling it looks favourable, you have proved nothing. You have looked up the option's price, converted it to a width, and then observed that the strike is where the price said it would be.
A cone cannot tell you an option is expensive. It cannot tell you a strike is safe. It is a change of units.
To get an actual opinion you have to bring something in from outside, and there is one honest candidate: draw a second cone using what the stock has actually been doing. At 26 percent realized rather than 28 percent implied, the April 17 1σ band narrows from $52.95 to $64.46 down to $53.36 to $64.05.
Forty-one cents. Two full points of volatility, on a $58 stock over 45 days, move the edge of the cone by forty-one cents, and that sliver is the entire theoretical edge in selling the option. Anyone drawing two cones and pointing at the daylight between them should look at how much daylight there is first.
What the cone gets wrong
It cannot draw a gap. The maths assumes the price moves continuously. Real stocks jump overnight on earnings, guidance and acquisitions, and a jump does not appear anywhere in the shape of the cone. Every one of the boundaries above is a smooth curve describing a process that is not smooth.
The tails are too thin. The 2σ band claims to hold 95 percent of outcomes. Actual equity returns produce more extreme moves than a lognormal distribution allows, so the true figure is lower, and the misses are concentrated in exactly the events that hurt a short option.
The volatility will not stay put. The cone is drawn once, at 28 percent, and holds it for 45 days. Implied volatility on a single name moves several points a week. The chain does not even agree with itself across expiries, so picking one number to draw the whole cone is already a simplification.
68 and 95 are not the honest headline numbers. They are properties of a model. Publishing them as "the stock will be in this range 95 percent of the time" is a claim the model cannot support, and any tool that says so is overselling.
How to use it anyway
As a units converter and a sanity check, both of which are worth having.
- Translate delta into a picture. Where does my strike sit relative to a normal move for this stock over this period.
- Compare two names honestly. A $3.31 move on CSCO and a $0.90 move on a $12 stock are not comparable in dollars and are comparable as cone widths.
- Check that a strike is not silly. A strike inside the 15-day band on a 45-day contract is a strike you have already been assigned on, whatever the premium looks like.
What it is not is a probability you can bank. It is the option market's own price, redrawn.
OptionsKing scores every candidate strike on a deterministic 0 to 100 scale, blends that score with the return on the capital the trade ties up, and shows you the highest-ranked handful. There is no minimum score. How it works covers what the ranking does and does not tell you.
Questions people actually ask
What is a probability cone?
A chart of the range a stock could cover by future dates, widening with the square root of time. The inner band holds about 68 percent of the model outcomes and the outer about 95 percent, both computed from implied volatility.
Where does a 0.20 delta strike sit on a probability cone?
Almost exactly on the 1σ edge. On the worked chain the $64 strike had a 0.203 delta and the top of the 1σ band at expiry was $64.46, so the two ways of describing the strike agree closely.
Can a probability cone tell me if an option is cheap or expensive?
No, and this is its most common misuse. The cone is drawn from implied volatility, which was itself extracted from the option price. Comparing an option to a cone drawn from its own price is circular. Draw a second cone from realized volatility if you want an opinion.
How accurate is a probability cone?
Directionally useful, wrong in the tails. It assumes continuous price moves and constant volatility, so it cannot represent an overnight gap and it understates how often large moves happen. Both failures land on the outcomes a short option cares most about.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read Screening and probability for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.