The Skinny On Options Modeling

Probability of 50% Profit

The Skinny On Options Modeling

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Our studies tell us that we improve the probability of our success by managing winners at 50% of potential profit so we are here to show you how Dough users can know the probability that their trade will hit that 50% level. Tom Preston (TP) and special guest Dylan Ratigan join Tom and Tony to explain things in this must watch segment.

TP began by explaining how we calculate option valuations and other metrics and what type of math we use to do so. The Black-Scholes formulas were cited as an example. When it comes to calculating the probability of profit though it’s a different type of math. TP explained that too, named some examples and explain how they work differently.

Since we believe in managing winners at the 50% of max profit level we decided we needed to offer those using the Dough platform a way to easily learn the probability that the 50% number would be achieved. The first step is using a “Monte Carlo” simulation. This has nothing to do with casinos or the South of France. TP explained the details of how it works.

We then tested its accuracy using empirical data. We calculated the prob. of 50% profit for a series of short 1 s.d. strangles in SPY with 45 DTE over a 10 year period and saw if it reached 50% of its max profit and then counted the number of times it did. The test showed that our simulations were accurate.

A table of a Monte Carlo simulation using a 1 standard deviation (SD) short strangle taken off at 50% of max profit and held to expiration was displayed. The table compared the average percent profitable, average P/L, average business days held and average of P/L per day held. A graph of the percentage of total trades that are profitable from 2005 to present was displayed. The graph included trades taken off at 50% max profit.

This metric is available only on dough. It takes only a few milliseconds to run the 1,000 paths and theo values of the Monte Carlo simulation but we cannot run the simulation continuously. You have to create the order and click on the caret button to run the calculation and see the probability of making 50% profit.

A snapshot of a SPY (S&P 500 ETF) short strangle on the Dough trading platform was displayed and discussed. The snapshot showed the probability of making 50% profit (P50), POP, ROC, extrinsic, IV Rank percentage, theta, delta and price.

Watch this segment of “The Skinny on Options Modeling” with Tom Sosnoff, Tony Battista, Tom Preston and special guest star Dylan Ratigan for a better understanding of probabilities and this new and valuable feature only available on the Dough platform.

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