Probability Data

Handy Chandra said: "Dear Dr. Dan, When using probability calculator using free tool from optionvue research, I always fill the future volatility data with IV Index data supplied from CBOE website ([url]http://www.cboe.com/)[/url]. I'm using current IV index call/put to check the probability as you taught us in your blog. While searching the net, I also got info that delta could be used as rule of thumb that the options will go in the money, that we would like to avoid. I hope could see your explanation after your busy holidays season. Best regards, PS : I also need some additional comment from Holzie and Toyshop. Thanks in advance."

toyshop said: "Handy, you caught me there. I actually couldn't figure out where to get the IV data from the CBOE site. You can help me on that. I hope I can use the optionvue's probability calculator if I know where to fine the IV data. I'm still wondering the IV is meant for the BUY or SOLD leg. Can Dr Dan advise on this? Handy, I have come across a webcast from Dan Sheridan recently. His advice is on credit spread strategy is this: 1. when to sell - sell 49 days expiration; 2. which call or put to sell - call with 7-8 delta, put with 6-7 delta. I have not followed this yet as I don't like to go into anything more that 30 days. Longer time span mean more volatatlity that can turn my trade into losing trade. Well, I can try to figure out the best delta figure to fit my trade preference in the mean time :) I am still learning and exploring. But since he had mentioned abt delta value when picking on which option to sell, then maybe there is some rationale in using delta value in calculating the probability. Someone else can add on this?"

drdan said: "Absolutely you can use the greeks to determine trades. Many trades to be called conservative you would like to see as Delta neutral in which both legs of the trade work out to a Delta Sum of zero and you would adjust accordingly as the price of the options change. HOWEVER - that can be complicated and since many of the people on this forum barely can speak options throughing the greeks at them would be well lets just say confusing. Also since I am not a greek trader I would not be the one to educate people on them. If you want we can have a discussion about it. There is a book I have laying around here that I'll have to find. I think it is called Trading the Greeks (imagine that??) that gives full in depth discussion about how to trade using the greeks. As for IV, for conservative credit spreads we do not really care what the price of the options are doing, except in the beginning because we want a good premium for our sold option. What we care about is the price of the stock and to be sure that it does not go above our resistance or below our support. So we need to know the IV of the stock which can be found in your quote detail page from your broker. Otherwise go to the CBOE website here [url]http://www.cboe.com/TradTool/IVolService8.aspx[/url] Put your stock or index in the little box and click go. It can be a little sensitive at times and gives you errors if it does that just try again. Then go to IV Index Mean and the first column which is the "current" one. For today looking at the SPX - IV Index Mean is 9.85 - low volatility."

holzie said: "[QUOTE=drdan]Absolutely you can use the greeks to determine trades. Many trades to be called conservative you would like to see as Delta neutral in which both legs of the trade work out to a Delta Sum of zero and you would adjust accordingly as the price of the options change. For today looking at the SPX - IV Index Mean is 9.85 - low volatility.[/QUOTE] I just want to touch on the delta neutrality. Dan is absolutely right. In a perfect world you really would like to be as "delta neutral" as possible. If you get past the greek mambo jumbo...delta neutral basically means that you collect same premium for the puts as you do for the calls. In theory, this sets you up perfect for a possible correction of the trade or nice closing of the trade (leg) while walking away with half the premium. But the options world is not perfect. As an example, I was trying to construct s delta neutral condor today on the SPX. The index was at 1414....to get a neutral condor I had to be short around 1390 for the put and 1450 on the call....with 3+ weeks till expiration, I said hell no to this theory. 1390 is way too close, plus January is always iffy and I can see SPX pulling towards 1390 in one afternoon if some dumbass on CNBC says that the Christmas season sucked......so my range was widened to 1370-1450....pretty acceptable, slightly uneven on the premium collection side but I could live with it. Yeah...but I could not get filled worth a flip, though. I started at 1.25 credit...waited...I should have been filled...well, all the way down to 1.05 credit..still waited...at that point I decided to scrap the trade because I realized I was chasing it=violation of our rules. So SPX is very tricky and this is not he first time I had trouble getting filled without having to sacrifice extra premium I felt I as entitled to. Lucky for me, and you, the SPY is traded on all options exchanges, not just CBOE, and I was able to get even better premium for the same risk. It is true, I had to trade 3 contract lots instead of 1 lot, so my commission was $18, instead of $6 but I got filled right away without feeling robbed by the market. So start with a delta neutral iron condor but check if the reality supports it. There will be times when support and resistance will be too far for you to collect any meaningful premium so you have to really do a lot of thinking. Holz."