Secret 59USE PROBABILITY ANALYSIS
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Another tool that can help you find good opportunities is to
calculate the probability of profit when you buy, write or enter an
option spread. Since 1985, my computer program, Option Master
®, has had a probability calculator. Now many others have
added the feature.
The probability calculator enables you to determine the
probability of making a profit if you hold the option positions
until expiration in a random market. Similar to the delta, it is a
good tool for comparing one option position to another. It is
an excellent tool for spreads that are designed to be held till
expiration.
Option buyers may be surprised at the results of the probability
calculator, for your probability will never be greater than
50% in a random market and usually lower than most would
think.
The point that should be made here is that we are assuming
the position is held till expiration.
However, these low probability results demonstrate that you
must be much more active as an option buyer and try to take action
before expiration. The simulator discussed in the next chapter
shows that much better probabilities can be attained if
actions are taken during the life of the option.
Another tool that can help you find good opportunities is to
calculate the probability of profit when you buy, write or enter an
option spread. Since 1985, my computer program, Option Master
®, has had a probability calculator. Now many others have
added the feature.
The probability calculator enables you to determine the
probability of making a profit if you hold the option positions
until expiration in a random market. Similar to the delta, it is a
good tool for comparing one option position to another. It is
an excellent tool for spreads that are designed to be held till
expiration.
Option buyers may be surprised at the results of the probability
calculator, for your probability will never be greater than
50% in a random market and usually lower than most would
think.
The point that should be made here is that we are assuming
the position is held till expiration.
However, these low probability results demonstrate that you
must be much more active as an option buyer and try to take action
before expiration. The simulator discussed in the next chapter
shows that much better probabilities can be attained if
actions are taken during the life of the option.