OPTIONS TRADING AS A BUSINESS UPDATE: Using ODDS Online to Find A Straddle s Exit Point

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Prosper Oliver
8 years ago
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1 This is an update to the Exit Strategy in Don Fishback s Options Trading As A Business course. We re going to use the same example as in the course. That is, the AMZN trade: Buy the AMZN July straddle (ask price of the straddle was 6.50). Here s how that trade looks in Version 6.2 of ODDS Online. To do this, I set the current date to (February 6, 2003), input AMZN ticker symbol, selected the 100-day historical volatility, and then chose the at-the-money July straddle options. I made sure that the target date was set to (July 19, 2003). I then hit the calculate button. Note that the historical volatility is slightly different from that calculated via MetaStock (58.51% vs. 58.3%, most likely due to a minor price difference in the stock data tables).

To do this, I set the current date to 20030206 (February 6, 2003), input AMZN ticker symbol, selected the 100-day historical volatility, and then chose the at-the-money July straddle options.

2 Once you have this part complete, hit the Profit/Loss Graph button. Here s what that graph looks like: Note the vertical blue bar. That bar slides across the chart. Up at the top of the graph, you ll see a field marked Price. That s the price of the stock where that blue bar is currently drawn. In the chart, the blue bar is drawn at $16. The profit is equal to zero, telling us that at $16, there is no profit or loss. That is the breakeven price. Also note at the bottom of the chart is a Probability of 20.4%. That means, based on the volatility input (100-day historical of 58.51%), there is a 20.4% chance that the straddle will be below the vertical bar price (the straddle s lower breakeven price of $16) on that target date (July 2003 options expiration). That probability number in red gives us the probability we need.

The profit is equal to zero, telling us that at $16, there is no profit or loss. That is the breakeven price. Also note at the bottom of the chart is a Probability of 20.4%.

3 Now, we need to recall what probability we re looking for. In your Options Trading As A Business manual, you ll find this graph: That graph has the one-standard deviation points marked. They are based on probability. The area under the bell curve in between +1 and -1 standard deviation is 68.26%. The tail area to the left is 15.87%. The tail area to the right is also 15.87%. The differences between the numbers in this paragraph and the numbers in the chart are due to rounding. Also, these numbers are based on the 58.3% volatility figure calculated by MetaStock, not the 58.51% calculated by ODDS Online. Rounding differences aside, the key point is that you need to find what prices are associated with a probability figure close to 15.87%. Now, recall that on the prior page, we were able to easily determine probability by sliding our vertical bar left and right. With that in mind, let s move to the next step.

The tail area to the right is also 15.87%. The differences between the numbers in this paragraph and the numbers in the chart are due to rounding. Also, these numbers are based on the 58.

4 Here is that Profit/Loss Graph, only this time, the vertical blue bar is located at the point where probability is 15.87%. The price of AMZN shares associated with that probability is $ That is your lower target!

5 Now, let s look at the upper target. Again, that s the price associated with 15.87%. The upper price of AMZN shares that are associated with that probability is $ That is your upper target. Please realize that you may not always be able to achieve precise probability targets. For instance, because stocks are priced in pennies (not fractions of pennies), you may not be able to find a price target whose probability is exactly 15.87%. It may be 15.89% or 15.84%. To sum things up, this is the process for finding the Exit Target using ODDS Online: 1. Enter the strategy into ODDS Online. Make sure you have the volatility set to the 100-day historical volatility and that your target date is options expiration. 2. Hit the Calculate button. 3. Hit the Profit/Loss Graph button. 4. Slide the blue vertical bar to the location where the probability is as close to 15.87% as you can get it. The stock price at that point will be your target.

$For instance, because stocks are priced in pennies (not fractions of pennies), you may not be able to find a price target whose probability is exactly 15.87%. It may be 15.89% or 15.84%.$

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