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Simple Options Math for Traders

The document discusses simple mathematical concepts related to options trading, highlighting the importance of statistics and probabilities. It covers key metrics such as Probability of Profit (POP), delta, and Return on Capital (ROC), and provides formulas for calculating these metrics. The main takeaway is that while complex calculations are handled by trading platforms, understanding simple formulas can aid in making informed trading decisions.

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kuky6549369
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1K views9 pages

Simple Options Math for Traders

The document discusses simple mathematical concepts related to options trading, highlighting the importance of statistics and probabilities. It covers key metrics such as Probability of Profit (POP), delta, and Return on Capital (ROC), and provides formulas for calculating these metrics. The main takeaway is that while complex calculations are handled by trading platforms, understanding simple formulas can aid in making informed trading decisions.

Uploaded by

kuky6549369
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Simple Option Math

Simple Option Math 1 of 6

Options trading is rooted in mathematic. To determine


the statistics and probabilities, it can require complex
formulas to calculate. We let the platform do those
calculations.

Some however are simple, those we will do in our


heads or with a few punches on the calculator. Today
we will cover a few of those stats.
V Simple Option Math 2 of 7

The stats that we let the platform calculate include:

● Implied Volatility ● Black-Scholes


● IV Rank ● 1 year of IV Data
● Delta ● Based on IV Levels
● Percentage
● Expected Move
Calculation
Simple Option Math 3 of 7

Stats that we will cover today:

Defined / Undefined Option Using the Percentage


(POP) of Delta Value
1/3rd Width of The Strikes Using the Credits
Potential and Realized Credits, BPR, and
Return On Capital Profits
Simple Option Math 4 of 7

The probability of profit (POP) for both defined and


undefined risk is easily calculated once the delta of the
short strike has been determined.
Probability of Profit Calculation
Actual POP Strangles 100 - (delta of short strike)
Minimum POP Iron
100 - 2 * (delta of short strike)
Condors
Simple Option Math 5 of 7

We will shoot for a minimum credit to width of strike ratio of around


⅓. Here is how delta will impact POP:

⅓ Width of Strikes
Delta of Short Strike
Probability of Profit
40 45%
30 50%
20 60%
10 Typically Too Low of Delta
Simple Option Math 6 of 7

When we consider the ROC we look at it from the perspective


of potential to realized.

Potential ROC Credit or Max Profit divided by BPR

Realized ROC Realized Profit divided by BPR

Return on capital helps to add context to a trade as well as


capital usage decisions.
Simple Option Math 7 of 7

Takeaways:

● Most option math is conveniently calculated for us


on our platforms.
● Remembering the simple formulas we covered
today, can ultimately assist in the trade decision
making process.
Simple Option Math 7 of 7

Takeaways:

● Most option math is conveniently calculated for us


on our platforms.
● Remembering the simple formulas we covered
today, can ultimately assist in the trade decision
making process.

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