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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.

TIA!

-Keith
No. of Recommendations: 1
<<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.>>

http://www.fool.com/investing/options/2006/10/24/be-your-own-casino-an-options-tutorial.aspx

http://www.fool.com/investing/options/2006/10/25/be-your-own-casino-part-2.aspx