Probability of Touch Before 0-DTE
By Ernie Varitimos
October 19, 2021
0:00 / 26:33
Probability of Touch Before 0-DTE

Yep. We live. I don't know why I always have to rearrange my seat when I just, when I go live, but there we are. I ain't doing friends or any here with the zero dash DTE podcast. It is, I can't believe it's Monday. It is Monday a brand new week. And I think that we are some of the few people that actually enjoy Mondays because Mondays mean three more chances at trading.

The Zara D is zero dash DTE strategy. Today, episode number 48, we're going to talk about expected move and probability of touch. Two very, very important concepts in zero D T E trading. Now, most people that are options trading, when they're figuring their strategy, they're always figuring it about, where are they going to be at expiration?

What strikes going to be in the money? They put on a strategy with a profit graph that is showing the potential profit at expiration, and that is their goal.

Now, the problem with that is that is extremely limiting. I guess it's limiting depending on what strategy that you're putting on and how you decide to actually use that strategy. So for example, if you're using a butterfly as a market neutral strategy, or let's say that you just like to use the butterfly in sh with short-term trading in the zero DTE world and you place the short strikes at the money.

So in other words, you're banking on for whatever period of time that you're going to achieve enough premium collection before price has time to go outside of the wings of the butterfly. Now this is a super risky way to trade it. Doesn't give you a whole lot of opportunity to profit, and it gives you a lot of opportunity to be in the red almost immediately as you start or engage in such a trade.

And it's the same way even worse. So with an iron condor. So the key here is. Why then are you using it as a market neutral strategy? When in fact it is far more effective as a directional strategy, it has properties in terms of its Delta and its data, or I should say the profit curve is flatter and rises faster and has a greater risk to reward than you could ever get trading directionally compared to trading it as a market neutral strategy.

So that makes it in fact, a superior strategy, even to a spread because of those properties, because of the property of being able to extend the profitability and the probability of touch well beyond the wings of the strategy.

So think about this by moving this strategy further out of the money from where you're starting your trade, you're doing two things now, of course you could just as easily, if you move it far enough, there's really not much difference in putting a butterfly as just putting a simple, oh, a long vertical, but you'll want that butterfly you'll want that extra wing there to reduce your risk and to also to increase your potential profitability, should price start moving towards that short strike.

And so, as a matter of ease, it's usually easier just to put the butterfly on as opposed to legging in, but you can leg into about a fly as well, but you're going to get much better characteristics if you start off as a butterfly with your profit curve, because it's going to be low and flat.

And by putting it further out of the money, you're going to have a much better risk to reward. In other words, you can control your risk to a very, very small amount, very, very tiny versus the potential profit. Now, of course, if it's so far away, what's the probability that you're going to be able to reach those short strikes and make all this gobs of profit in general, it's relatively low, but let's say that you place the short strikes far enough away.