Noobie question about probability of ITM (math, probability)

W

winson

Hi all,

I am new to options trading just hope to get some help here if possible.

I watched a few Youtube videos about options trading, these videos mentioned about math and probability about the trading, especially probability of in the money, I was wondering how these are calculated? Thank you very much in advance!

Best regards,
Winson
 
WOW! It looks like a whole raft of new BSM/delta/probability videos have been posted to YouTube in the last couple of years! Could be great stuff; could be stinkers. (There are a stunning amount of stinkers -- warning.) Bionic Turtle is a great source for all sorts of math -- I used him in giving extra help to algebra students many years ago. All-around great math guy. But the university seminars tend to be my favorites -- they're a whole lot more conversational, and have an easier flow to them... (MIT, Harvard, Stanford, Yale, Michigan, several UCalifonias...)

In any event,
• there is no direct mathematical link between Probability (ITM at expiration) and the option delta. (For a clear example: put deltas are negative -- while probability is restricted between 0.0 and 1.0)
• we can constructively infer such a link with a couple of assumptions about the underlying and the distributions around which it varies. For equities, these assumptions are usually pretty minor. I have found this MIT presentation to be my favorite -- but again, I have not looked at the new YouTube posts...
 
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The option dealt the is the probability in the money, as other traders have mentioned, but that is based on just the straight math of the position. It does not consider real-world situations. You need to do your own analysis, consider the Delta along with what else is going on in the world or the company that could influence the direction of the stock.
 
panzerman said:
Delta approximates the probability of finishing ITM. The probability of touching the strike during contract lifetime is approximately twice the probability of finishing ITM.
More...
Please explain:

So, if delta is = 0.51, the probability of touch is 1.02? And since it is greater than 1, it guarantees a touch?

Thanks.
 
Delta cannot be greater than 1.00, which means a 100% guarantee of finishing in the money. A delta of .51 means the option has a 51% chance to finish in the money.
 
It's a ballpark apx..

Ignoring crazy vol/high int rates, most .50 delta options are close to ATM..So an option with a .52 delta is almost certain to be touched,hence a close double of Delta.

Obviously options ITM with Deltas above .55 are already touching,so no need for mental math-turrbation




ironchef said:
Please explain:

So, if delta is = 0.51, the probability of touch is 1.02? And since it is greater than 1, it guarantees a touch?

Thanks.
More...
 
ironchef said:
Please explain:

So, if delta is = 0.51, the probability of touch is 1.02? And since it is greater than 1, it guarantees a touch?

Thanks.
More...

It is the probability of the strike being touched ( regardless of option type )
... use the OTM delta ... which should always be less than 0.50
 
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