Probability of Touch
By Ernie Varitimos
March 21, 2022
0:00 / 21:26
Probability of Touch

All right. 3, 2, 1.

And we're live a doing and friends Ernie here with the zero days two expiration podcast. And this is episode number 83. Yes, we are out of sync. Last week was episode 84 because they skipped 83 and we still have that elusive episode number 70 that has not been found, but trust me, it will be found. Today, we're gonna talk about a concept called probability of touch.

Now you've probably heard of probability of profit or what some people call probability of being in the money. And those are interesting concepts. You can see it on your. Trading platform, particularly think of swim. You can actually set up your options change so you can see probability of profit and probability of touch, and let's get to some definitions and why we prefer probability of touch over probability of profit and the may main reason.

I'll, skip to the chase here. The main reason why we prefer probability of touch, as opposed to probability of. Profit is that probability of profit also known as pop. That is a measure at expiration. So in other words, there's the expectation when you're taking into consideration this probability that you're going to take your all the way to expiration.

Now we're doing. Day trades. We're trading the very last day of expiration. We may take that trade in the morning in the, maybe at noontime in the afternoon. And we wanna be in and out as quickly as we can with the maximum return that we can. There are on occasion that we can hold a trade right into expiration.

And those are the good days because we know that when we are doing that, we're coming close to pinning a trade. In other words, we're, the price has moved very close to our shorts strikes. That's where we achieve our maximum profit. And so, so, so on those days, yeah, we want to be. Holding as long as we possibly can.

And then perhaps get out right at the very end of the market or hold it right into expiration. And that's great when those days happen, we say, hallelujah, we love those days, but they are the minority of days really time while it's on your side in terms of theta. Because we're generally putting on trades that are theta positive Vaga, negative time is on your side for the most part, if you're in the right position.

But if you're not in the right position, time is not on your side. Time is your enemy. So you, you have to weigh those two things. So probability of profit, let's it. Pop. That is the odds that you will achieve at least 1 cent of profit by expiration. So when you look at it on your trading platform, that's what you're looking at.

You're saying, okay, I'm going to be somewhere inside of the profit tent of whatever strategy that I'm using, or actually it's about that specific strike. And I'll make it I'm hoping, or the odds are that I'll make at least one penny of profit at expiration. Now we're not really concerned about one penny of profit to tell you the truth.