Got it. Interestingly, the odds prior to placing IC's doesn't really matter either. Most of the really good IC traders I know place their short strikes above and below major resistance/support. Odds of all options expiring really is irrelevent--they do not hold these positions to expiration anyway (too much negative gamma and no positive theta to hedge).
It's like that famous Monty Hall problem The probabilities for each of the three doors is 33.3%. The probability that the car is NOT behind the first door you choose is 33.3+33.3=66.6%.
for each short strike consider alone, the prob of touch is 0.60. most likely time to touch short strike should be lower than half the option life time.
the probability of a 1 month option sold 1 sigma away being touched is 15 percent. for a 1 sigma strangle it is 30 percent. there is a variance of course. this is for the spx since '83.
Here is the math: stdev = (ln(future_price/current_price))/(volatility*sqrt(days_til_expiry/252)) probability = normsdist(stdev) The probability is the area under the curve to the left of the future_price. I generally calculate 20-day historic volatility, and find the probability for 20 days in the future. Keep in mind this assumes the markets move in a perfectly random-walk fashion, which they most assuredly do not.
i have no idea what your post is trying to say. it is not understandable. could you try one more time?
Mark, you know I'm the first person to back you up when you're right, but you're wrong on this one. An easy way to see that you're wrong is that if you swap the calls and puts in your calculation, the put has a 21% chance of finishing ITM and the call has 30% chance of finishing ITM. Put another way, you have a 30 delta option finishing ITM 21% of the time, and which one it is depends on whether you think of the calls first or the puts first. The actual error is in "30% of that 70%". The call finishes ITM 30% of the time, not 30% of 70% of the time. 30% of all market outcomes leave the call ITM. Being short a put can't change the probabilities for the call. The guy who mentioned the probabilities of two mutually exclusive events had it right.
cb, I decided it's time to learn a bit about probability theory and to my embarrassment, you are correct. Sync, I apologize for the incorrect reply (twice). I did not grasp the important difference when events are mutually exclusive. 30 + 30 is indeed 60!! Mark
You are so right. One other option (pardon the pun) is to have a IC management plan in place to adjust as needed WELL BEFORE you get too close to a short strike. IC's are so tantalizing because of the premium you can collect but they can turn on you in a heartbeat. Have a plan.
After doing some more research I understand this point now. I see that if an IC has a 30% probability of expiring ITM, it actually has a 60% probability of going ITM some time during the trade. I see now that trade management is quite complex.