win rate and profit rate

Is there a way to calculate the profit expectancy of a short vertical spread?

Maybe Prob OFM*BIT)-PROB ITM?*ASK of higher strike)? This way total prob is not 100% though

Any ideas?

 

I’d say 0.
If it’s not zero net,
Then someone is going to exploit it.

 

It's probably martingale theoretically. In other words at any point in time your best guess is the present value.

This doesn't mean you couldn't take a shot at developing an empirical model for say SPY. But there are a lot of non-linearities involved that make deriving a theoretical expected value non-trivial.

One idea is you could create a binomial tree and assign some up/down percentage to the stock. Run the model for a few thousand iterations (depending on time frame) and derive the various profit/loss from these by creating the spread at each leaf of the tree. You could average these and arrive at some number. While probably not accurate, it's at least an idea. The problem shows up quickly though. You would be operating under constant volatility in this simple model which means the results could be dramatically different under a regime change.

 

could be anything.
take pdf of price distribution

 

try this

https://www.optionsprofitcalculator.com/

 

never2old, that looks interesting.

 

In about even chance games I prefer reverse martingale

 

Option alpha has some good ideas. ie in a credit spread the width of the spread times delta should be <= credit