Theta (time decay) is a major benefit for those selling option premium. How can we use the probability that an option will expire out-of-the-money (OTM) to aid our mechanical trading and increase our probability of profit (POP)?
An extensive study was conducted on SPX for the 2015 calendar year There were 388,000 occurrences using every strike and expiration on each day. We calculated the probability for every option expiring out-of-the-money (OTM) each day and compared that to the realized percentage of options that expired OTM.
A table comparing SPX OTM calls and puts excluding premium was displayed. The table showed that the calls expired ITM more than expected and the farther OTM puts expired worthless more than expected. Tom and Tony mentioned that this is something Karen The Supertrader realized years ago. A graph of all the OTM SPX options for 2015 and their theoretical probability expiring OTM versus the actual percent that expired OTM was displayed. The graph showed the advantage of Volatility Skew for strategies such as naked short puts, Dynamic Iron Condors and Jade Lizards.
Watch this interesting segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and how to use the market probabilities to increase your probability of profit.
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