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Suppose I have a bull call spread where I am long on an ATM Call (+ 0.509 delta) and short OTM call (- 0.220 delta).

What will be my probability of success in this trade?

  • I don't believe there is enough information given to answer this question. But I'll wait to see what our member who is an options expert has to say. – JoeTaxpayer Mar 22 at 13:26
  • @JoeTaxpayer - I too am curious as to what his opinion is. – Bob Baerker Mar 22 at 14:01
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    Ok. That was a little scary. Considering I did not 'at' you.... glad you know the hat you've earned. – JoeTaxpayer Mar 22 at 14:04
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    Hey Joe (wailed Hendrix), I'm just a retail guy trying to earn a buck :->) – Bob Baerker Mar 22 at 14:08
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Your otherwise interesting question is one that may not have enough detail. I just pulled up the probability graph for a trade I entered into a few months ago.

You can see that it required a current price, prices for both strikes, as well as the stock volatility, interest rate, and days until expiration. In my case, 'success' wasn't quite yes/no, as there's the range where the price is within the spread prices and while profitable above the spread cost, it won't provide the maximum trade return.

Disclaimer - this is not 'investing', it's a form of gambling. In effect, would you bet $1 for a 25% chance of getting back $10? (It was 25% when the position was first entered)

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As Joe Taxpayer stated, there isn't enough information to answer this question.

In nearly 40 years of using options, I have never had the slightest interest in what the probability of a trade is because my decisions have always been made from price and indirectly, implied volatility. So while I can contribute some info, I have no definitive answer for you.

Some use delta as a proxy for the probability that an option will expire in the money. Your OTM short call has a delta of 0.220 so the probability of your spread achieving maximum profit would be 22%. Take this proxy with a grain of salt because delta varies as implied volatility changes.

Tom Sosnoff of ThinkOrSwim fame uses the following formula (for a vertical spread) to calculate Probability of Profit where POP is the chance of making at least $0.01 on a trade. Unlike him, I'm not an expert but I don't think it's accurate or useful other than to indicate the spread's P&L ratio. It doesn't take IV into account or the distance of strikes from current price:

100 - [(the credit received / strike price width) x 100]

I think that Lawrence McMillan who wrote one of the 'bibles' of option trading is a reliable source of information. At his website, there's a free probability calculator:

https://www.optionstrategist.com/calculators/probability

I'd bet that the results from it would be reasonably close to the delta estimate.

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