Using Option Delta As A Substitute For ITM Probability - YouTube

Hey everyone.

This is Kirk, here again at optionalpha.com.

And in today's take-5 segment, I want to show you guys how you can use Delta as a substitute

if you either don't have Thinkorswim or don’t know how to add the probability of being in

the money for any particular option trade that you're looking at.

A question that we get often (and I probably get at least five emails a day on this) is,

“Kirk, I don’t have Thinkorswim.

I can’t figure out what the probability of my option being in the money or the probability

that it’s going to lose.”

In this video, I want to show you how you can use a Delta as a pretty rough substitute.

Now, it’s not going to be exact, it’s not going to be as detailed as the actual

statistic, but Delta is a great tool to use, so that it gives you a good comparing apples

to apples in a sense if you don’t have or can’t load the probability of being in the

money.

In this example, we're going to look at Apple stock.

It’s just a really good example because it’s highly traded, lots of activity in

the options.

And you can see that these are the December contracts and these are the January.

Whether you're in Thinkorswim or Schwab or Trade Monster or Trade King or whoever you

use, interactive brokers, you’re always going to have the different contract months.

Now, they will always give you the Delta of any of the options.

That’s pretty much on every broker platform.

And if your broker doesn’t give you Delta, then you’d absolutely need to make a change.

But Delta is the one that they usually give you because it’s one of the important Greeks.

Now in Thinkorswim, they also give us this column that says “probability ITM,” this

probability that if you trade a given option, the likelihood that that option will be in

the money, ITM by expiration.

In this case, they have them both for the calls and the puts.

Now, let’s look at about the 120 strikes here just for Apple just so we can compare

apples to apples for January and December.

But in this case, the 120 strike has a probability of being in the money which is a little bit

higher than where Apple is trading right now, (Apple is trading at 116.47) but the 120 strike

calls for December have a probability of being in the money of 29.81.

What that means is that there's a 29.81 or basically a 30% chance that Apple trades above

and closes above 120 by December expiration which is 30 days out.

Now, we can then use Delta as an approximate probability because you can see the Delta

of those options is .32.

You can use now Delta as an approximation because the actual probability is 30%, but

the Delta is around .32.

If you use Delta, you could say maybe there’s about a 32% chance that Apple trades above

120 by expiration.

If we do the same thing out in the January options, you can see that the 120s have about

a 34.8% chance or about a 35% chance of trading above and closing above 120 by expiration

and you can see that the Delta is a little bit higher as well out here, it’s about

38.

It’s not going to mirror up exactly, you’re not going to have a 1:1, but the Deltas (if

you don’t have this probability calculation) give you a little bit better understanding

of what your likelihood of success is on a given option and it works in both directions,

not only with the calls, but also with the puts.

If we look at let’s say the 115 puts for January, you can see the actual probability

is about 47% and the Delta is about .43.

It’s a little bit off, but it gives you a good basis and context for how you can determine

probability without actually having that physical calculation.

Hopefully this video was really helpful.

As always, these take-5 segments are here for you guys just to take 5 minutes out of

your day to learn one new cool thing about options trading.

And as always, if you have any comments or questions, please leave them right below in

the email and comment box.

And happy trading!