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Option R:R vs. probabilities
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Option R:R vs. probabilities

  #1 (permalink)
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Option R:R vs. probabilities

When trading options, what is a good ratio of probability vs reward:risk? When buying naked options, the risk is capped with exponential returns possible, but the probability is low.

Credit spreads: say you are collecting .50 in premium with a maximum risk of 1.50. but there is only a 15% chance of the market fully expiring past your purchased option. (100 trade sample: 85 trades gross .50 = 42.5, 15 losses x 1.5 = 22.5, 20 profit) Is this favorable? What would be?

If doing an Iron condor, would you keep strikes equal from the current underlying or extend one side of it based on probability?

Just looking for general discussion or guidelines that others use when putting on credit spreads. I've recently started tracking some Iron Condors in a sim acct and am looking for some input from others.

My research is showing that you should be able to calculate probability based on models using volume, greeks, volatility etc.

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from my limited understanding iron anything is going to limit your rate of return, two great option traders i have study one preferred butterflies and other strangles, they both actively manged the trade after it was on. but as always you are going to need to know your greeks and what conditions are needed to place the trade.

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jupiejupe View Post
from my limited understanding iron anything is going to limit your rate of return, two great option traders i have study one preferred butterflies and other strangles, they both actively manged the trade after it was on. but as always you are going to need to know your greeks and what conditions are needed to place the trade.

I too like strangles, and had success with them in higher volatility environments (in the es). Strangles in stocks seem more dangerous with out the out of the money protection like you have in an iron condor. You never know when a buyout, lawsuit etc will move a stock exponentially

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sim trade

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.
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It expired worthless on Friday.
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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:
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So I risked $1715 to make $685. distance between short option and long option - credit recieved.

There was a 18% chance that the underlying got below the short put (and even less that it got to the far out protective long put) Was this a good R:R?

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lrfsdad View Post
Was this a good R:R?

$685(.818) - $1,715(.181) --> $560.30 - $310.415 = $249.885

looks good to me.


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lrfsdad View Post
So I risked $1715 to make $685. distance between short option and long option - credit recieved.

oops, I risked 1815 to make 685.

685/1815=37% ROI in 5 days.

so using the above mentioned probabilities of about 20%, if I do this trade 100 times, 80 times I would make 685, or 54800 total and I would lose $1815 20 times or $36300. Leaving a net profit of approximately $18500. IB includes commission in their p&l calculations, but trading ten lots at a buck a piece would be $20 per rt or $2000 on 100 trades so the 18500 is 16500.

assuming I can trade weeklies, It would take two years to fulfill this example. If you calculate roi based on the maximum risk taken each round turn(i'm not sure what was charged for margin) 16500/1715=962% in two years.

If the first 20 trades went bad, that would be a cost of $34300. then your roi would be 16500/34300 = 48% in two years.

Still I'm wondering if this is valid statistically and if my calculations are correct?

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volatility

I should mention that I came across this stock using a high implied volatility over historical stock scan at IB. I would post a screen shot, but implied vol isn't coming up probably because the mkt is closed.

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GES

using the same criteria, I have the same spread on in GES. April expiry though so a few weeks left. Put on when the stock was 27.92 on 3-12-13. It closed Friday just over 25.00. Implied vol vs historical was 49.4 vs 27.7. my position is:
Long April 23P
Short April 25P
Short April 30C
Long April 32C

My short put is ATM. Spread is slightly in my favor:
here is shot of the option chains when I put the trade on and after Friday's close:
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One of the motivating factors for this thread was this video OPTION TRADER makes $105MM PROFIT in the NDX, SPX & RUT - Her STORY Uncovered - YouTube
I watch this channel on my roku during the trading day when possible. These are the guys that created thinkorswim. Also thanks to @ron99 for his futures options thread.

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