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Subject:  Win Probability in Credit Spreads Date:  11/26/2007  9:47 PM
Author:  hayswk Number:  8487 of 11356

I have been calculating the win probability of vertical credit spreads based on the delta of the short option (using the IV of the ATM strikes for the month in question).

I recently heard of a method which simply takes the max loss divided by the strike difference ...

For example, if you purchase a 100/110 Call Spread of XYZ for a max loss of $5, that would correlate to a 50% probability of making at least one cent on the trade.

A comparison of this method vs. the much longer method of calculating the Delta of the short option shows that the simple method NEVER calculates a lower win probability than the more complex method.

Does anyone have any insight on this?

Hamp (I think), you had a great article re: the relationship between win/loss probability and the premiums paid/received which may help ... I can't find that link.


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