Delta & Probability Question

This is a discussion on Delta & Probability Question within the Futures & Options forums, part of the Markets category; Hello, I've been reading about the Greeks, and have a question for the option crowd here. In my readings on ...

Reply
 
LinkBack Thread Tools Search this Thread
Old Jan 23, 2010, 5:12am   #1
 
6 Posts
Joined Jan 2010
Delta & Probability Question

Hello,
I've been reading about the Greeks, and have a question for the option crowd here. In my readings on Deltas, it is said that when an underlying is exactly ATM, its Delta should be .50, which basically says that the underlying has a 50/50 chance of either going ITM or OTM.
I could agree with that premise in a completely directionless market, but what if the overall trend is bullish or bearish? If the underlying is biased towards one direction or the other, its probability should be greater that 50% of going one way or the other.
Unless the Delta calculation already takes the market's bias into account.

Agree? Disagree?
Highlander1 is offline   Reply With Quote
Old Jan 23, 2010, 11:22am   #2
 
Martinghoul's Avatar
Joined Feb 2009
Re: Delta & Probability Question

A theoretical concept, such as the Black-Scholes delta, doesn't take particular mkt conditions into account. Why should it? In certain cases, this means that using simple B-S for delta calcs is not a good idea and you need to refine the model. However, this is normally the case for deep OTM options.

In the case you have given, the above doesn't apply. Delta of an ATM option is always arnd 1/2 (not exactly that for puts, but close enough), regardless of your personal opinion of which way the mkt is going. Unless you somehow have a rigorous way to prove the existence of trends/biases and forecast direction? If you do, why would you worry about deltas and the rest of this malarkey. If you know which way the trend is, just buy/sell outright and forget options.
__________________
"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."
Martinghoul is offline   Reply With Quote
Thanks! The following members like this post: Richie_A
Old Feb 11, 2010, 5:18pm   #3
 
1 Posts
Joined Jun 2009
Re: Delta & Probability Question

Does anyone actually knows the maths behind this,ive heard on other forums that's its wrong to think of D1 os the prob of finishing ITM?
BlkScholes27 is offline   Reply With Quote
Old Feb 11, 2010, 5:31pm   #4
 
Martinghoul's Avatar
Joined Feb 2009
Re: Delta & Probability Question

It's not wrong, per se. It's just the risk-neutral probability, which is a special beast.
__________________
"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."
Martinghoul is offline   Reply With Quote
Old Feb 16, 2010, 2:59pm   #5
Joined Jan 2009
Re: Delta & Probability Question

One of the assumptions of B-S is that the underlying's price follows a Markov process, so that you can't determine what the next move is going to be from the past history. Whether this is actually the case or not is a different matter.
Scouser76 is offline   Reply With Quote
Old Feb 16, 2010, 3:48pm   #6
Joined Sep 2004
Re: Delta & Probability Question

Highlander...Read up on smile and skew to give you a better understanding of how all this stuff interrelates. If I see a good link I'll post.

GJ
__________________
"That which doesn't kill me makes me stronger"
GammaJammer is offline   Reply With Quote
Old Feb 16, 2010, 10:44pm   #7
Joined Jan 2009
Re: Delta & Probability Question

Indeed, the presence of a smile would suggest a trend, as a lognormal distribution of returns of asset price shouldn't give rise to one.

If you define an ATM option as one whose strike is at the CURRENT spot price, then the delta will be someway off from 0.5, depending on the maturity of the option. You need to consider the underlying's price when the option expires and look at the ATM Forward.
Scouser76 is offline   Reply With Quote
Old Feb 18, 2010, 9:04pm   #8
Joined Dec 2008
Re: Delta & Probability Question

Quote:
Originally Posted by Scouser76 View Post
Indeed, the presence of a smile would suggest a trend, as a lognormal distribution of returns of asset price shouldn't give rise to one.

If you define an ATM option as one whose strike is at the CURRENT spot price, then the delta will be someway off from 0.5, depending on the maturity of the option. You need to consider the underlying's price when the option expires and look at the ATM Forward.
Don't make any sense. A smile does not suggest a trend at all. If an index is trading 3000 and you have a 3000 strike call/put IT WILL have a delta of 50%, simple as that.
tripleogstar is offline   Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
A quick question from a newbie about Delta Garbanzo Futures & Options 7 Jul 24, 2009 8:32am
Probability question WinstonSmith Psychology, Risk & Money Management 15 Apr 14, 2007 7:57pm
Probability, Statistics & Trading Perrington Psychology, Risk & Money Management 36 Apr 15, 2005 7:23pm
Anyone bought S&P Probability Trading Strategies Manual parisd Trading Systems 1 Feb 11, 2005 8:02pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)