Donna,
The probability of the shorts expiring worthless is relative to the model you're using or the discussion group you're following. This discussion has taken place in many of these groups, journals, blogs, and is currently being discussed at the optionclub.com site.
So to answer your question... I'm really not definitively sure. But to elaborate a little further, in this position, it really doesn't matter as much as it does with respect to the Iron Condor. As the positions approach the shorts, you make your maximum return. At the exact short strike, is when your maximum return, for all relative purposes to this discussion, occurs. (The exception being if the SPX went up 150+ points, the ratioed long position will increase faster than the ratioed short positions, thus creating an unlimited upside potential).
Should the position gravitate beyond the shorts, but within the longs, then volatility plays a huge part. This is why it's difficulte to express a definitive return on Margin. That said... you can use historical prices to calculate approximations, but without the exact volatility increase or decrease it's hard to determine.
If the Market Moves Down Big:
If you think what may happen if the market moves from here (1298) to 1225 in the next five weeks or so.... I would imagine the volatility (VIX) would definitely increase. If the shorts expire worthless, you can bet the 1190p would be worth a ton with four weeks of time value remaining in it.... So... shorts expire worthless and pay for the intial trade, the value of your longs will be your profit.... which could be huge (20-40%). You may even have a few pennies left in the long May 1320c.
As the market moves below your short 1225c, you lose 100 deltas at expiration. But remember, no time premium is left at expiration on the shorts. The long May 1190p are now increasing in delta and increasing in gamma and you have more of them than you do your shorts... ie, major profit.
If the Market Moves Up Big:
Same scenario as above, except volatility would probably bleed out of the long May 1350c, but there will still be some left along with time premium. Who knows... volatility may even pop up depending on the circumstances of the movement... eithe case, you still profit...
If the Market Does Not Move:
The shorts will expire worthless and the position will pay for itself, so any money left in the long positions will be your profit. You'll have to fight the MMs to get out of those positions, but historical data backtested around a 4-6% return. If the volatility bled out significantly... then 2-3% return on margin. Being at somewhat historically low volatilities levels.... the odds tend to be in our favor here.
Summary:
Picking the strike prices took some time with much trial and error. The volatility skew between the months change and along with the spread on the b/a, made the strike selections difficult.
Hope this helps Donna.
Sure wish I were trading "hair cut" margin.
Congratulations Coach....
Murray
I want to understand your thinking. Is it always a ratioed diagonal or 1:1?