SPX Credit Spread Trader

[yip1997]

Quote from momoneythansens:

Not sure there is a closed-form analytical solution for POT. However, take your pick of numerical methods: lattice models e.g. binomial, trinomial etc.

You can choose to assume the brownian motion stochastics for stock prices.

Or...just use ToS like everyone else

MoMoney.

I think there is a closed-form solution. I used to have one and programmed it. It is pretty close to my monte carlo simulation. After some changes in my software, it sometimes gives me a value bigger than 1. I am curious if I got the correct formula.

You cannot start from the brownian motion stochastics because the cumulative effect of numerical error is too large.

 

[yip1997]

Quote from momoneythansens:

LMAO. Think of it as an investment. It's not like the debit is gone forever...you can always cash in whenever you want!

I knew. I just get used to collect premium.
I like this trade b/c it will me a good balance of my overall portfolio. Now My RUT position has a small delta, a bigger theta and a bigger vega.
If the volatility increases next week, I can profit from vega. If not, just collect the theta decay.

This trade can also serve as a hedge for my previous 650/640 Spread.

 

[momoneythansens]

Quote from yip1997:

I think there is a closed-form solution. I used to have one and programmed it. It is pretty close to my monte carlo simulation. After some changes in my software, it sometimes gives me a value bigger than 1. I am curious if I got the correct formula.

You cannot start from the brownian motion stochastics because the cumulative effect of numerical error is too large.

You're right, there probably is a closed-form solution, I'm rusty on this topic after becoming dependent on other people's software...or...just get a bigger CPU and run many iterations of your Monte Carlo simulation!

Point is, applying false levels of scientific accuracy to what is an inherently a fuzzy domain (price action) may bring one face to face with the laws of diminishing returns.

2 cents.

 

[ready]

Mo
I should be paying money for this.
LMAO

 

[cdowis]

I guess somebody, perhaps myself, does not know what they are talking about.

At this very moment, I am looking at the probability analysis for IWM @ 69.62 on TOS. Shows what appears to me the bell curve with same probability for the same distance up and down from the current price. One sigma up and one sigma down, same price distance. 34% and 34% probability, same absolute distance up and down.

Please help me, and explain how TOS is using a lognormal curve. There is something basic here that I do not understand.

 

[xtrhvydty]

Cache made some very good points earlier - the point is know the probability of random behavior!

 

[rallymode]

Quote from momoneythansens:

Not sure there is a closed-form analytical solution for POT. However, take your pick of numerical methods: lattice models e.g. binomial, trinomial etc.

...i always thought the only use for POT was to put it in a bong and light it up.

In my opinion, thats still its only practical use despite TOS's efforts to assist the retail mind.

 

[cdowis]

I think of POT as the "scare" factor. How likely is the maket to touch my stop out price. Most of my losses occurred because I was stopped out of a position, rather than the actual price at expiration.

 

[dagnyt]

Quote from cdowis:

Most of my losses occurred because I was stopped out of a position, rather than the actual price at expiration.

We all know this, but it's worth restating: That's the way is has to be. If you never stopped yourself out of a position, you'd win a lot more often. But, every once in awhile, not closing would result in a devastating loss. That's why we pay insurance and close positions.

Mark

 

[yip1997]

Quote from cdowis:

I guess somebody, perhaps myself, does not know what they are talking about.

At this very moment, I am looking at the probability analysis for IWM @ 69.62 on TOS. Shows what appears to me the bell curve with same probability for the same distance up and down from the current price. One sigma up and one sigma down, same price distance. 34% and 34% probability, same absolute distance up and down.

Please help me, and explain how TOS is using a lognormal curve. There is something basic here that I do not understand.

If you have the same probablity going up the same distance as going down, they are using bell curve. Thats not right according to academic research. You should have a wider up distance than down distance using same probability. It also means it has a bigger chance of going up the same distance than going down.

That being said, if you have used this strategy with a certain probability value from TOS and found it profitable, just keep doing it. The exact value might not be useful in your trading unless you want to find the expectancy.