Probability of expiration for an iron condor

Discussion in 'Options' started by sync, Aug 31, 2008.

  1. sync


    If you have an IC with a credit and the short strikes each have a delta of 30, what is the probability that the market will reach one of those strikes at expiration - is it 30% or 60%?

    I realize there are other factors involved. I'm just trying to figure out how to estimate this based on the deltas.
  2. hdawg87


    Using a delta is a rough estimation of the probability of expiration. If both of the legs have a delta of exactly 30 then there is a 30% chance of expiration. If you are doing some kind of ratio condor or other variation on the plain-vanilla condor you would have to throw the spread into some type of analysis software to tell you the probability of expiration in that particular case.
  3. rosy2


    maybe this...

    In [2]: .3 + .3 -(.3*.3)
    Out[2]: 0.51000000000000001
  4. gkishot


    What software did you use?
  5. sync


    That's what I thought. Yesterday I watched a Dan Sheridan video at CBOE and he said it was 60%.

  6. I think 60% is the correct answer.

    Look at it this way, a coin toss is 50% what is the combined probability of heads or tails?

  7. gbos


    If you are asking what’s the probability of the price ending at expiry either above a higher strike price or below a lower strike price with deltas +0.3 and -0.3 then the answer is aprox. 60%. (30% above strike1, 30% below strike2, 40% between strike2 and strike1)
  8. If the area under the bell curve above the higher strike is p=0.3, then the area under the curve below the strike is 1-p = 1-0.3 = 0.7.

    For the second lower strike the area below that strike is p2 = 0.3, and above 1-p2 = 0.7

    Therefore area between strikes is (1-p) - p2 = 0.7 - 0.3 = 0.4
  9. sync


    I use TOS. I don't fully understand the Analyze screen yet and am not getting consistent results with it.
  10. sync


    I actually did come up with that analogy on my own. But with a coin it has to be one or the other. With an option it doesn't have to reach either strike price.
    #10     Aug 31, 2008