I want to be able to determine the probability of a short option position (call or put) expiring worthless.
Don't know where to start but I see probabilities derived from the greeks on some web sites?
I want to be able to determine the probability of a short option position (call or put) expiring worthless.
Don't know where to start but I see probabilities derived from the greeks on some web sites?
As I have often heard this theory of "delta == probability of being ITM", I just put on some wise words from Paul Wilmott ;)
You can think of delta for calls (-delta for puts) as the first order approximation to probability of expiring in the money. If you subtract this probability from 100%, you'll have the probability of expiring worthless.
If you want more exact probability, there are algorithms to construct a pdf from IV skew, and calculate probability from there.