Are the probabilities on SpreadHacker real?

P

ProStrats

So I've been looking at spread hacker, and the probabilities seem to good to be true. such as a 90% chance of a 400% gain. That can't be right, or am i wrong.

I tried placing a trade (verticle spread), on JDST, and the mark on spread hacker said .85 for the put I was selling, and therefore the order went in as a limit to sell at .85 ($99 calls). when I checked out the option chain, the bid was more like .10. I could have this entirely wrong as I am new to options, essentially what I'm asking is, are the methods TOS uses to calculate the probabilities not based in reality, and therefore this wonderful little spread hacker 'gold mine' I've stumbled upon really not as good as it looks?

What am I missing here? 90% chance of 400%, all calcuations served up for me on a silver platter? that can't be right, right?

Thanks guys!

Sincerely,

Robert
 

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I'm not familiar with this "spreadhacker", but in general one thing you have to look at when talking about high probability trades is the max loss. Options are very asymmetrical with respect to max profit/loss. Very different from stocks.

To more clearly illustrate. What if you have a 90% chance of 400% return. What % of your capital are you going to allocate to this? What is your max loss in the event this trade happens to be the 10% that loses? There are many options trading strategies that have very high win rates, but while the losses are rare, they can be substantial.

Another item to consider is the spread and liquidity. What time of day did you run this tool? If it was outside of RTH, I wonder if it was using incorrect data for the bid/ask.

There's never going to be a free lunch. There's almost always going to be a reason and that reason could be something like it was using historic volatility data, but the reason for that high volatility (say an earnings report) occurred this morning and therefore actual volatility is going to be lower. Or vice-versa. Perhaps there was an announcement that will cause the volatility to be higher than the historic volatility, but the software doesn't take news in to account, only historic volatility.

Just some random thoughts. I'd be trying to figure out the "gotcha". Research that underlying and any events that may come in to play during the contract period. Good luck.
 
Not a ToS user -- just mildly familiar with tidbits served up over time.

That said, I believe you're conflating PoP (the probability that the outcome *will*breach* $1 profit) with the maximum value percentage return, should everything come out rosey. There could be many strikes worth of difference, dependent on the combo created.

As others in this thread have implied, reward *always* follows risk. Always always always.

As Lee wrote above, "I'd be trying to figure out the "gotcha". Research that underlying and any events that may come in to play during the contract period. Good luck."
 
tommcginnis said:
Not a ToS user -- just mildly familiar with tidbits served up over time.

That said, I believe you're conflating PoP (the probability that the outcome *will*breach* $1 profit) with the maximum value percentage return, should everything come out rosey. There could be many strikes worth of difference, dependent on the combo created.

As others in this thread have implied, reward *always* follows risk. Always always always.

As Lee wrote above, "I'd be trying to figure out the "gotcha". Research that underlying and any events that may come in to play during the contract period. Good luck."
More...

Thanks Tom Mcginnis!
 
Two comments from an amateur:

1. With a 90% chance of 400% gain, why aren't they trading this themselves? It is almost like printing money and they are handing you the printing press for free?

2. Perhaps their model is flawed - sounded like they use bid for buy and ask for sell in their model, based on what you posted?
 
Honestly that was my first impression. This can't be right. As you said it would be a printing press. Basically I'm just trying to poke holes in the theory of finding near perfect trades by just sitting down, and 'poof' they're there.
 
On very thinly traded options, the bid/ask spread are wide and if you are able to buy at bid and sell at ask, you almost always guarantee to make lots of money.
 
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