Hi, I will be new to options trading... Say that I want to do bull call spread for BAC, is there a way to know the probabilities of success ? And is there anything I should watch out for as a rookie. Thanks
You can use Delta as a proxy for probability, or use standard deviations-Bollinger bands are quite handy
If i find out that my delta is 0.20 as of last night, does it mean that i have 20% of exercising the call option ? Or in other words, since I'm selling covered call, my chance of keeping my stock is 80% right ? Also, I'm wondering how much you guys pay per trade; If I were to trade 10 contracts ... it would have cost me 10$ base fee + 1.25 x 10, for a total of 22.5 bucks. It seems a little bit much to me when all I am left with is like ... 40 bucks. And if I were to buy back the calls prior expiration ...I would have to pay another 22.5 bucks to avoid pin risk.
Delta of 0.20 can be taken as a 20% chance of that option being in the money at expiry. Are you sure you have the multiples right? In the US an option is usually based on 100 shares-in the UK it's 1,000-so here an option quoted at a price of 10= £100. A typoical UK stock would trade for about £5 As shares in the US tend to be pricey-Apple is $600 so using the multiple of 100 would make those options quite expensive for small players. I would typically pay about $5 per lot in fees
No, there's no way to know the probability of success. The best you can get is the mkt's current guess for this probability. If you're doing a call spread, you don't need no delta. Simplistically, the price of the spread defines the odds.
I had this one saved as a bookmark. You have to wade through the normal Elite Trader version of "Your Mother wears combat boots" but there is some useful information in it. Thread title: Probability of Success in Spreads http://www.elitetrader.com/vb/showthread.php?t=262880
Yes... I'm pretty sure my multiples are right. Currently long 1000 shares of BAC, so its 10 contracts alright. As for Apple, yeah its expensive, that's why I'm not playing with those stocks yet. 5 bucks in fee hein, interesting, which firm do you use ? I'm using Cibc, I don't think I can do a spread in a single trade ... It seems to me I can only enter one position at a time, I guess I will have to call them tomorrow as It would be very unfortunate to get assigned when I'm trying to pull a strategy. I was thinking of using Interactive Broker, but not sure if they are good for options trading.
Yes, that's what I wanted to know; the market guess as at the trading instant. I understand that with every passing moment, the odd changes. My bad, I wasn't clear in my statement. When you say the price of the spread defines the odds, I'm assuming with great risk comes great reward; hence lower probabilities. But is there a way to interpret this assumption in numbers ?
Thank you! Time to run some numbers haha. Also, I was wondering how much contracts one typically trade with a spread; do you do many small trades or just all in ? If I were to run 5-6 spread simultaneously, isn't it a little bit hard to get organised ?
Brighton- couldn't put it better myself- you buy a spread for 10 when strikes are 50 points apart then your odds are 1 in 5. I buy put spreads with odds of 1 to 8 when they get hit I clean up. Fighting the FED and all those liars and money printing scumbags is not fun though