Haven't posted in a while, what are your thoughts on the following trade? I placed this trade today as a gamble. Didn't really expect much volatility today, but just wanted to see how the trade could play out if its a losing trade, with none of the following happening. Ended up closing for a loss of $45 of max loss $75. 1) With SPY @ 205.50ish with IV of about 15-16,vix at current levels (assuming this has some predictive vol of the spy, if I'm misinformed please correct me). 2) Upcoming economic event friday or just trade this with an expectation of a gap up or gap down. Close position if neither occurs. 3) Long 206Call or 205.50 (depends on cost)/ Short 207.50 call Long 205 put /Short 203.50 put cost : 0.70-0.80 B.E is about 0.35-0.4% move. Given the above vix and IV. The daily expected range is about 0.80- 0.85%. So, if I'm not mistaken, there is about a 30 to 36% chance for a move outside the Daily expected move and a 60-70% chance of staying within the range of +/-0.80/0.85%. With the B.E being between 0.35-0.4% of a move, this trade has approximately at 30-35% chance of the SPY staying within this range and a 65-70% chance moving outside this range, to where it would be profitable at expiration. Thoughts?
I like to use the pricing of options as better indicator of probability (in liquid markets specially) than even the deltas - fewer approximation errors and easier to deal with also. Its a 75cent spread (mid of 70-80); and max it can go to is 1.50. So its a 50-50 shot with negative theta. So as time goes by the probability of loosing increases unless there is a big move.
Thanks for the response. How do you figure there there's a 50-50? are you just basing that off of the 2:1 Reward to risk? So a 50% chance that it hits full profit of 1.50. Does this account for the probability of B.E as well? If not, this would give a better than 50% chance of success no? This trade is only one day to expiration. So either there is a 0.40% move for B.E or better or its a loss. If the average daily range of the spy is about 1%, is it fair to believe that a one direction move is 0.5%? Do you have any information on studies done on average daily move from thursday to friday including gap ups or gap downs? This would save me on doing the calculations myself.
Here is pnl curve based on next months options. Theory should remain the same; here is the IC collecting 1.28 on a width of 1.50; there is a 17% chance (.22/1.28)of it being in the profit zone.
yes; but if you look at the payoff - it evens out. Think area under the curve - its all perfectly priced.
Well yeah, but isnt the higher % of success what we are aiming for? The pay off is a decent % too. But this IC, its not 1 dte?