When a trade shows negative expectancy do you pass on it or take it and just manage it more closely? I usually will not take the trade... the exception is if recent events lead me to expect a more favorable price distribution in the future...which would imply a better expectation. The expectation I compute here is based on the distribution of past prices.
But aren't the probabilities based on the options' IV rather than SV and therefore be forward-looking?
MCD: http://finance.yahoo.com/news/mcdonalds-mcd-beats-q4-earnings-155703939.html http://finance.yahoo.com/q/ks?s=MCD Key Statistics http://stockcharts.com/h-sc/ui?s=mcd http://finance.yahoo.com/echarts?s=MCD Interactive# Trade: with MCD at 89.74 June 100/105 bear call spread for a net credit of $30 Yield = 30/470 = 6.38% in 147 days or 15.8% annualized Prob = 82% Expectation = .82(30) - .094(470) - .09(235) = 24.6 - 44.2 - 21.15 = -40.8 Price.....................Profit / Loss..................ROM% 70.00.........................30.00........................6.38% 80.00.........................30.00........................6.38% 90.00.........................30.00........................6.38% 100.00.......................30.00........................6.38% 100.30.........................0.00........................0.00% 105.00.....................(470.00)....................-94.00% 105.42.....................(470.00)....................-94.00% 120.00.....................(470.00)....................-94.00% 130.00.....................(470.00)....................-94.00%
UPS: http://finance.yahoo.com/news/ups-takes-hit-during-holidays-142244501.html http://stockcharts.com/h-sc/ui?s=ups http://www.msn.com/en-us/money/stockdetails/fi-126.1.UPS.NYS?symbol=UPS&form=PRFIEQ http://finance.yahoo.com/q/ks?s=UPS Key Statistics Trade: with UPS at 102.93 Jul 115/120 bear call spread for a net credit of $48 yield = 48/452 = 10.6% in 174 days or 22.2% annualized Price................Profit / Loss..............ROM % 90.00...................48.00....................10.60% 100.00.................48.00....................10.60% 110.00.................48.00....................10.60% 115.00.................48.00....................10.60% 115.48..................0.00......................0.00% 120.00..............(452.00).................-90.40% 125.00..............(452.00).................-90.40% 135.00..............(452.00).................-90.40% 150.00..............(452.00).................-90.40%
Hey Dan, You forgot to include the expectation calculation for the UPS trade: Prob = 81.7% Expectation = .817(48) - .123(452) - .064(226) = 39.2 - 55.6 - 14.46 = -30.8 (You're welcome )
AAPL http://finance.yahoo.com/news/bull-day-apple-aapl-bull-060006551.html http://stockcharts.com/h-sc/ui?s=AAPL Trade: with AAPL at 113.85 Mar 95/90 bull put spread for a net credit of $26 Yield = 26/474 = 5.5% in 53 days or 38% annualized Prob = 91% Expectation = .91(26) - .04(474) - .05(237) = 23.7 - 19.0 - 11.8 = -7.1 Price...............Profit / Loss............ROM % 70.00...............(474.00).................-94.80% 80.00...............(474.00).................-94.80% 90.00...............(474.00).................-94.80% 94.74....................0.00.....................0.00% 95.00...................26.00....................5.50% 96.86...................26.00....................5.50% 110.00.................26.00....................5.50% 120.00.................26.00....................5.50% 130.00.................26.00....................5.50%
Hi Oldnemesis, I am a bit confused by the way how you calculate the expectation for your trades. In APPL's case, shouldn't be like this: Expectation = 0.91 x 26 + 0.04 x (-474) + 0.05 x ((26 - 474) /2) = -6.5 Also, in a previous post you mentioned that you are getting the probability numbers from TOS. Is there a way to have TOS calculate the expectation for a trade as well? TIA.