Risk reward sucks for options

The fly PNL is nearly-symmetric from 112. It's a + expectancy due to the fly-bump. Run a monte carlo sim when you finish that arithmetic.
 
poopy said:
The fly PNL is nearly-symmetric from 112. It's a + expectancy due to the fly-bump. Run a monte carlo sim when you finish that arithmetic.
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I do not believe the monte carlo sim applies as the options pricing model is not an ergodic system.
 
wxytrader said:
Looking at 5 contracts of the Aug9 NVDA 112 call @ 4.75 for a total cost of 2375

If we have the following outcomes by AUG8 these are the results:

1SD move is 115.64 (@ 3.97) = pnl of -390 (risk reward = 6:-1)
2SD move is 119.03 (@ 7.08) = pnl of 1309 (risk reward = 2:1)
3SD move is 122.72 (@ 11.02) = pnl of 3136 (risk reward = 1:1.3)

So basically if we use a 1:1.5 risk reward as a minimum benchmark you pretty much need a 3SD move to maintain that ratio.

These calcs are with 10% adj for vol to increase from the current 58% to 68% which is the current IV for the 103 Call which is roughly 10 itm.
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I know there are some issues with the math as mentioned in later posts, but what you have demonstrated in my opinion is the pointlessness of buying at the money call options, just buy the stock then.

If you really want to exploit options, buy deep out of the money options. That is where the potential mispricing and value is because no one knows how to model the extremes (see Nassim Taleb for a more wholesome discussion).

So wallstreetbets are actually on to something and are not entirely wrong in their crazy option plays, just that their portfolio allocation of 100% to one trade is misguided. :cool:
 
poopy said:
The expectancy, not the pricing model. The fly pic shows the payoff at maturity.
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So the expectancy in other words is the expected IV at a future price prior to expiry?

So here are 10 AUG9 110 strike calls purchased @ 5.60. If price reaches 114 on Aug1, at the current IV of 60.39% the pnl is 842.43 or 6.44 per contract.
6.44-5.60=.84

upload_2024-7-29_18-5-35.png


However IV will increase the further itm the call becomes, so this projection is not accurate without adjusting for change in IV.

If IV were to increase just 5% the pnl changes from 842.43 to 1040.

upload_2024-7-29_18-32-37.png
 
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poopy said:
no.
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Oh look, it's Poopy, who has me on block for no reason other than I claimed he was Destriero because i recognized his posting style, and he got bitchy because he wanted to "hide from people looking for him."

Cloak and dagger shit, it seems.

Meanwhile, this pug is looking every which way till Sunday to find how I am fake.

He cannot find it. And so, be /blocks me, because he is afraid.

Destriero/poopy is fake.

I don't suffer fools, Destiero. Idjit.

YOU started it.

 
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Overnight said:
Oh look, it's Poopy, who has me on block for no reason other than I claimed he was Destriero because i recognized his posting style, and he got bitchy because he wanted to "hide from people looking for him."

Cloak and dagger shit, it seems.

Meanwhile, this pug is looking every which way till Sunday to find how I am fake.

He cannot find it. And so, be /blocks me, because he is afraid.

Destriero/poopy is fake.

I don't suffer fools, Destiero. Idjit.

YOU started it.

More...


@overwatch doesn't trade.

upload_2024-7-29_19-21-36.png


 
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