Option R:R vs. probabilities - Options on Futures | futures io social day trading
futures io futures trading


Option R:R vs. probabilities
Updated: Views / Replies:3,950 / 30
Created: by lrfsdad Attachments:11

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 11  
 
Thread Tools Search this Thread
 

Option R:R vs. probabilities

  #21 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received


lrfsdad View Post
I put this trade on in LULU on Monday. I chose short strikes about 10% out of the money on the weeklies. Then the next strike for the long protection option.
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


It expired worthless on Friday.
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).



Being in a downtrend, I am posting the probability of this expiring below the short strike with a calculator I found at Free Probability Calculator | Option Strategist I used the implied volatility of the short put for this example:
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

Why not just use the delta of the option to calculate the probability of expiring in/out of the money?

Reply With Quote
 
  #22 (permalink)
Elite Member
milwaukee,wi, usa
 
Futures Experience: Intermediate
Platform: Mobile TWS & mobile TOS. Dough.com
Broker/Data: IB, TOS, FXCM
Favorite Futures: futures and options. looking into forex
 
lrfsdad's Avatar
 
Posts: 186 since Nov 2012
Thanks: 302 given, 160 received


Greg Loehr View Post
Why not just use the delta of the option to calculate the probability of expiring in/out of the money?

I'm not familiar with that strategy, please advise. Thanks!

Reply With Quote
 
  #23 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received


It's not a strategy. If you're interested in the probability of an option expiring in/out of the money, you can just look at the delta. It's a decent approximation of an option's probability of finishing in the money. Much easier than going through some option calculator.

Reply With Quote
 
  #24 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received

But...also remember that whenever you attach a probability to something, you also have to attach a time frame. So using the delta as a surrogate for probability assumes expiration as the time frame.

Reply With Quote
 
  #25 (permalink)
Elite Member
milwaukee,wi, usa
 
Futures Experience: Intermediate
Platform: Mobile TWS & mobile TOS. Dough.com
Broker/Data: IB, TOS, FXCM
Favorite Futures: futures and options. looking into forex
 
lrfsdad's Avatar
 
Posts: 186 since Nov 2012
Thanks: 302 given, 160 received

so your saying an option with a delta of .2 has a 20% chance of expiring ITM? This is figured into the pricing weather it expires in a week or 6 months? Obviously as the delta increases, so does the chance of being ITM.

Reply With Quote
 
  #26 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received

Yes, it's figured into every option, and every expiration. But keep in mind a few things. First, it's an approximation. It's pretty close, but still an approximation. Second, it's constantly changing due to volatility changes, movement in the underlying, and the passage of time. Third, it doesn't say anything about "profitability".

There's nothing magical about calculating the probability of something finishing ITM. It's the time that the market goes against you and how you manage the trade that really counts.

Reply With Quote
 
  #27 (permalink)
Trading Apprentice
portland or
 
Futures Experience: Advanced
Platform: tos
Favorite Futures: options
 
Posts: 5 since Jul 2013
Thanks: 1 given, 2 received

Another great post by Greg! Saying it a different way, probability assumes you stay in the trade until expiration. Most traders never do this. Also you can double that probability and approximate the chance of getting hit by price. At this point most short traders have adjusted their trade. So the way I look at it is the higher the probability of a short, the more likely I won't have to adjust before I exit. But it also means I have less credit do deal with adverse moves.

Finally most option trades like High Prob condors means you get low credit in exchange for the high probability. So to get returns, you need to stay in the trade as long as possible to have the decay. In lower prob trades where you get a much better reward to risk, you can just take a piece of the decay and exit. So your market exposure is much less with a lower prob trade.

Reply With Quote
The following user says Thank You to termn8er for this post:
 
  #28 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received

Thanks.

If you're going to sell an iron condor, sell the options with a 16 delta. That puts your short strikes approximately at the end of the expected range on both sides, and now at least you're taking volatility/expected range into account rather than a raw probability or R:R.

Reply With Quote
The following user says Thank You to Greg Loehr for this post:
 
  #29 (permalink)
Elite Member
milwaukee,wi, usa
 
Futures Experience: Intermediate
Platform: Mobile TWS & mobile TOS. Dough.com
Broker/Data: IB, TOS, FXCM
Favorite Futures: futures and options. looking into forex
 
lrfsdad's Avatar
 
Posts: 186 since Nov 2012
Thanks: 302 given, 160 received

@Greg Loehr

I just read your article in this month's issue of futures magazine. Can you provide some candidates for this strategy?

Thanks

Reply With Quote
 
  #30 (permalink)
 Vendor: www.optionsbuzz.com 
Portsmouth, NH
 
Futures Experience: Master
Platform: Broker platform
Favorite Futures: options
 
Posts: 25 since Jul 2013
Thanks: 0 given, 10 received


Take a look at YHOO for example. We're watching this closely and this strategy is up 5.9% in first month.

CLF is another.

Reply With Quote

Reply



futures io > > > > Option R:R vs. probabilities

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Jigsaw Trading: TBA

Elite only

FuturesTrader71: TBA

Elite only

NinjaTrader: TBA

Jan 18

RandBots: TBA

Jan 23

GFF Brokers & CME Group: Futures & Bitcoin

Elite only

Adam Grimes: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Webinar: Al Brooks on Probabilities, Timing and Scaling Big Mike The Elite Circle 14 January 24th, 2015 04:12 PM
Do you now your probabilities? no111 Psychology and Money Management 3 April 1st, 2012 06:40 PM
Webinar: Master The Gap - Trading Historical Probabilities Big Mike The Elite Circle 14 January 26th, 2012 10:30 PM
Some thoughts and musings on trading with probabilities. liquidcci Psychology and Money Management 9 July 7th, 2011 10:23 AM
Option on NT 6.5 jz166 NinjaTrader 2 April 8th, 2010 03:14 AM


All times are GMT -4. The time now is 10:59 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-18 in 0.14 seconds with 20 queries on phoenix via your IP 54.226.113.250