Probability of expiration for an iron condor

[dagnyt]

Quote from sync:

... if an IC has a 30% probability of expiring ITM, it actually has a 60% probability of going ITM some time during the trade.

I see now that trade management is quite complex.

True. Risk management is your key to success.

A 30% probability of FINISHING ITM does NOT mean a 60% of moving ITM at some point.

Others can provide a way to calculate the probability of 'touching' the strike. I believe TOS offers that calculation to its clients.

Mark

 

[IV_Trader]

Odds to touch / odds to close = 1.5

 

[sync]

Quote from dagnyt:

A 30% probability of FINISHING ITM does NOT mean a 60% of moving ITM at some point.

Others can provide a way to calculate the probability of 'touching' the strike. I believe TOS offers that calculation to its clients.

Mark

I came up with the 60% from TOS.

 

[riskfreetrading]

Quote from sync:

I came up with the 60% from TOS.

it should be higher that 60%, because just the prob to touch one of the strikes is 60%

 

[gbos]

Quote from sync:

I came up with the 60% from TOS.

There are analytical formulas to make this type of calculations. I don't know this software and if they have a correct implementation. Check out the online calculator here

http://www.hoadley.net/options/barrierprobs.aspx?

it gives accurate theoretical answers.

 

[sync]

Quote from riskfreetrading:

it should be higher that 60%, because just the prob to touch one of the strikes is 60%

Isn't it extremely unlikely that the underlying would touch both strike prices?

 

[dagnyt]

Quote from sync:

Isn't it extremely unlikely that the underlying would touch both strike prices?

After touching one strike, it takes an extra large move to reverse and touch the other.

But, it's a real risk. Here's advice I follow when trading iron condors: If I decide to adjust one side of an iron condor to reduce risk, I almost always buy back the winning side because the price is relatively cheap and there is little to be gained from holding.

Most traders fail to take out this insurance policy, and they win most of the time. But, that occasional loss can be very costly.

Mark