tastylive logo
Video Player is loading.
Current Time 0:00
Duration 0:00
Loaded: 0%
Stream Type LIVE
Remaining Time 0:00
 
1x
  • Chapters
  • descriptions off, selected
  • captions off, selected
      Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
      Market Measures

      Probability of Touch | Realistic Expectations

      Apr 8, 2016

      There is a formula for calculating the expected move of an underlying such as a stock or futures contract based upon its price, implied volatility (IV) and the number of days to expiration (DTE). However this calculation does not factor in volatility skew.

      The probability of touching a given strike price is approximately double the probability that the underlying price will expire beyond that strike (based on the concept of stock returns behaving according to Brownian Motion). The study we ran uses historical strangles to examine probability of touch as it relates to the strike prices of 1 standard deviation strangles.

      A 10 year study was conducted in SPY (S&P 500 ETF). Every trading day a 1 Standard Deviation Strangle (16 Delta Call and Put) was sold in the expiration cycle closest to 45 DTE. We then tested how often SPY touched the Call strike or Put strike before expiration. A table of the expected probability of touch and actual probability of touch (over 10 years) of SPY 16 Delta Puts and Calls was displayed. The table showed that the calls had been tested more often than the puts. Tom and TP noted that this in essence is why Karen The Supertrader was so successful. The next table displayed added the expected and actual numbers for the puts and calls expiring in-the-money (ITM). The final table showed the percentage of trades that were profitable despite one leg of the strangle expiring ITM. That table factored in the premium collected which helps our probability of profit (POP).

      For more on the concept of Probability of Touch we recommend the Market Measures from September 15th, 2015 “Probability of Touch”.

      For more on the concept of Brownian Motion and stock returns we suggest these segments:

      Watch this segment of “Market Measures” with Tom Sosnoff and Tom Preston for a better understanding of probabilities as they relate to options expiring ITM and being "tested" prior to expiration.

      This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

      More like this

      tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

      tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

      tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

      tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

      © copyright 2013 - 2025 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.