There is a column available on the TOS option quote than can give the % chance of ITM. I sold some ES puts today with a 2% chance of being in the money. 98% chance of being out of the money. And a delta of 0.0093 .
ESZE - 1440 P. TOS also in the analyze tab will give a chart of the ITM & OTM probabilites.
Per Ron99's rule I will be looking to exit at about 1665 under present conditions, but this will change with time.
It is difficult to estimate the chance of being 30% in the money. Too many variables that can change.
But I will compare the two.
From what I understand, treating delta as roughly equivalent to the probability of expiring ITM assumes that prices are distributed lognormally. And whether that is the case or not can be debated. But assume a stock is trending higher for some time. For example BA, which is up 79% YTD and in a nice steady trend. Clearly, the distribution of prices is not lognormal, but is following an established trend. To me, the implication is that the trend is likely to continue. So clearly, a delta value for a BA option is not likely to really give an accurate indication of expiring ITM/OTM. So doesn't one need to examine the underlying to determine the usefulness of delta, on a case-by-case basis?
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Delta isn't really dependant on lognormal prices because it's calculated on basis of IV, which already account for possible fat tails. So delta would be an accurate representation of risk of ITM, presupposing option markets correctly price probabilities. There are many studies on the predictive power of IV, and most agree that it's the best measure for future volatility there is. But still, it tends to severely overestimate downside movements. For instance the 1680 ES put for Nov 15th on ES has a delta of 1. That means opt. markets imply a 1% possibility of a 5% crash in ES in just 3 days. It might sound rational but historical data says otherwise...these crashes don't occur merely as often as option markets seem to think they do. But this is is exactly why selling options is so profitable to begin with...
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I am using the TOS platform to compare the (Span Margin + loss for position) -> 3 * initial margin (IM) (possible exit) and the 30% probability of in the money that may be the exit rule used by Karen referred to in the Tasty Trade video.
Using the TOS simulation mode I sold the following:
/ES put (ESH4 Jan 1505 ). 5% prob. expiring ITM. Delta=0.04. IM=1038. 65 DTE. @2.06 ($137.50) .
Looking to the Profit/Loss chart, (Span Margin + loss for position) -> 3 * initial margin (IM)
will occur at approximately at 1645 with a loss of $470.00 .
Looking at the probability column for the Jan put options a 30% probability of being in the money occurs
at approximately 1695 with a loss of $180.00 .
This assumes that nothing changes but price, which is not the actual case. So this is a very approximate
comparison of the two.