Sunday, November 17, 2019

probability - Heuristics for calculating theoretical probabilities of being ITM at time T for listed options


I'm looking for a heuristic way to calculate the probabilities of being in the money at expiry for non-defined risk options combinations (listed options).


I use delta as a proxy for this probability of success for single options, which makes an implicit distributional assumption.



For spreads I use width of the spread (or the worst drawdown/largest possible gain for more complex defined risk combinations) and $ received/paid for it. I treat the options combos as if they were bets and I get the implied probabilities from the prices of those bets.


What is a good heuristic for estimating such probabilities for straddles and strangles (and other non-defined risk combinations)?


EDIT: To clarify the above: a straddle/strangle is a bet. What's the probability of this bet being profitable at expiration? How do I imply the probability of success of this bet?




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