How do I determine odds in a credit spread?

D

dcwriter2

I'm tinkering with the Kelly formula and it makes sense except when it asks me for the odds. Does that mean if I am writing a spread with delta of -.98, way out there, my odds are 1:98 and how is that expressed in a percentage or decimal?
 
A put credit spread is a call debit spread.

It doesn't work that way. Price the opposing side (2D put) as a digital. You're fucked beyond reason on a touch so what does it matter what the odds are?
 
Ok, I'm writing bear call spread, at least that's what IB calls it. Way OTM, like one wing of an iron condor, ok? Now what are the odds that I would plug in for the Kelly?
 
Kelly works well in digitals (AON payoff) but not when laying stupit odds. This may not be the best career choice for you at this time.
 
2% probability of losing it all at exp. 4% prob of losing it all tomorrow. Go back to 9th grade.

Baron, permission my block, plz. I'll be good.
 
dcwriter2 said:
Ok, I'm writing bear call spread, at least that's what IB calls it. Way OTM, like one wing of an iron condor, ok? Now what are the odds that I would plug in for the Kelly?
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That's a good way to blow up your account^^

The "odds" you're talking about are implied by the options prices...and they don't necessarily mirror your true odds. The true return distribution is unknown and you're betting against it by buying cheap implied distribution and selling expensive distribution via options.

If you're selling cheap "odds" against expensive realized distribution you trade at negative edge. Add full Kelly to it and your risk of ruin is 100%
 
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