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RE: What is positive versus negative mathematical expectation in option spread trading?

in Banking and Finance • 5 years ago

You hit the nail on the head:

However it also defines mathematical expectation, a useful term to understand, and it also provides a good argument for only trading vertical spreads with credit equal to or greater then 1/3 the distance between the strike prices of the call we sell and the call we buy.

Good job!

5 years ago in Banking and Finance by
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     5 years ago 

    As did you;

    If you only trade this rule, it looks like this;
    A call credit spread is created by selling SPY April 6th 269 for 0.74 and buying the April 6th 270 call for 0.31 for net credit of 0.33, which times 100 = $33.00 per contract.

    The “new” mathematical expectation calculation looks like this;
    $33 x 0.79 = $26.07 (win)
    $ 67 x 0.21 = $14.07 lose)
    So if you trade this credit spread 100 times, you will win $33 79% of the time for a total gain of $26.07 and you will lose 21% of the time, $67 x .21 = $14.07 loss. So if you do the math, this vertical spread trade with a 33% credit requirement to make the trade does have a positive mathematical expectation.

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     5 years ago 

    Thank you.

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