Calculating Probability of Expiry Out of the Money

Discussion in 'Strategy Development' started by Greenfuji, May 3, 2004.

  1. I have been trading various index's for a while now by selling different strikes far away from the money with the aim of letting them expire worthless. The process so far has been a guessing game as to what strike to sell.

    I have been trying to use various techniques to determine the probability of a strike expiring worthless. Does anybody know of a technique or can point me in the right direction?
  2. ig0r


    The price of the option is the probability that it will end ITM, basically

    There's really no special way to do it, you get what you pay for (or vice versa)
  3. ===========================
    Guessing game with discertion ;

    is right with some of the inaccurate option data,

    however certain patterns tend to be over priced & not to favor a buyer like me ,like deep OTM calls in a bear market,
    course we are in a green bull market now.:cool: Greenfuji

    also certain months tend to be flat/down notable like Sept.

  4. nitro


    This is not a secret. People are making markets in exactly what you are talking about.

    Do a search for digital options.

  5. Doing some searching on Digital/ Binary Options and the many other names they go by, results in finding a lot of option pricing theories. The Black-Scholes being the most popular method used or theory based upon.

    What I would like to determine is the probability the option will expire worthless not whether the option is under-valued or not. Should I be looking at extrapolating values based on the index? What calculations can be done to do such extrapolations? Are there any tools that can be used?

    Thank you Nitro for pointing me in the right direction, I just need some more directions.
  6. Use Delta<20 , together with double top or bottom pattern ( or any other reversal pattern you like ) and less then 30 days to expiration for less then 20% chance to get in the money.