Basic question #5 in the "taking one for the (B) team" series.
How do you measure "success" in an options trade? The question sounds trivial, but maybe it is not?
Any real broker would give you a modeled profit vs share price curve, as a function of time. This assumes that the IV structure doesn't change. Something like below. I also plot the share price, and +/-1 SD and +/-2 SD bars (where the expected move is computed for the full DTE)
I suppose you could just integrate under the curves to determine an "average profit" vs DTE. But it doesn't seem to make sense to integrate out to +/-4 SD, since you'd presumably close the position long before that.
I'm currently computing average profit over the +/- 1 SD range, and the POP, for each DTE.
I'm not exactly sure how to compute a "return on capital", since for a short premium strategy, you'll take in credit. I see many people basing ROC on profit/buying power reduction.
I'm sure there's much that I'm missing. Thanks in advance for your wisdom.
How do you measure "success" in an options trade? The question sounds trivial, but maybe it is not?
Any real broker would give you a modeled profit vs share price curve, as a function of time. This assumes that the IV structure doesn't change. Something like below. I also plot the share price, and +/-1 SD and +/-2 SD bars (where the expected move is computed for the full DTE)
I suppose you could just integrate under the curves to determine an "average profit" vs DTE. But it doesn't seem to make sense to integrate out to +/-4 SD, since you'd presumably close the position long before that.
I'm currently computing average profit over the +/- 1 SD range, and the POP, for each DTE.
I'm not exactly sure how to compute a "return on capital", since for a short premium strategy, you'll take in credit. I see many people basing ROC on profit/buying power reduction.
I'm sure there's much that I'm missing. Thanks in advance for your wisdom.
