So this may be a stupid question.... on a spread such as an IC or Strangle, setting short strikes at about 16% OTM would equal 1 standard deviation.
On a Vertical Spread, does setting the one short strike at 32% also equate to 1 standard deviation? Since you retain the 68% ITM, I'm thinking you retain the same risk by shifting the risk from one side to the other?
Correct. Using the often times useful method of using delta to determine the ITM/OTM probabilities, a strangle or IC with short strikes at 16 delta would have +- 68% probability of being OTM. A vertical spread with short strike at 32 delta would also have +- 68% probability of being OTM.
You donít trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
Last edited by DarkPoolTrading; February 26th, 2016 at 02:31 AM.
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