Decision Recipes

Evaluating Opportunity Probabilities

Evaluating opportunity probabilities allows you to evaluate a position’s probability of profit to filter for opportunities when adding new positions.
Evaluating Opportunity Probabilities
Steve Henry
May 24, 2021

The decision recipe for evaluating opportunity probabilities has four inputs:

  • Opportunity
  • Profit/in-the-money/max loss
  • More than/less than
  • Percentage

This decision recipe allows you to evaluate a position’s probability of profit to filter for opportunities when adding new positions. Probabilities are derived from the Black-Scholes options pricing model.

Screenshot displaying the decision recipe for evaluating opportunity probabilities

The first field prompts a dropdown menu to choose a position type. The decision recipe will then prompt you to choose a ticker symbol and, if it is an options position, add the details of the options legs.

Screenshot of the decision recipe's dropdown menu criteria

The second field prompts a dropdown menu to select if the position will be profitable, in-the-money, or at a max loss at expiration. The third field prompts a dropdown menu to choose if the second field’s probability is more than or less than the fourth field, where you manually input a percentage. When you have finished creating the recipe select, “Save.”

Screenshot highlighting the save button following the decision recipe inputs

NOTE: You can also create a custom input, which allows you to input the field later to make the decision recipe dynamic across all automations.

The decision will be added to the list of criteria. The recipe will pull in data from the opportunity’s details to evaluate if the position’s probability is more than or less than the fourth field’s input value.

You have the option to add more decisions to the recipe or return to the automation editor. When finished, select “Save” again to return to the automation editor.

Screenshot highlighting the save button to return to the automation editor

The automation editor will display your completed decision criteria for evaluating opportunity probabilities.

Screenshot highlighting the decision recipe within the automation editor

You can always select the decision inside the automation editor and make changes to the criteria.

No tags found.
Next article
Evaluating Position Performance
Evaluating position performance allows you to evaluate whether a position’s premium has increased or decreased by a certain percentage. Here is how to use it.
Was this helpful?
FAQs

How are opportunity probabilities calculated?

Please refer to the Technical Documents found here : Getting Started - Option Alpha Docs

How are the "Profit", "In the Money" and "Max Loss" criteria calculated?

Please refer to the Technical Documents found here : Getting Started - Option Alpha Docs

What are the definitions of "Profit", "In the Money" and "Max Loss"?

"Chance of profit" means the probability that the position will yield a profit being above break-even by expiration day. "In the money" is the probability the underlying price will be above/below (call/put) the strike price of the option at expiration. "Max Loss" is the maximum amount that can be theoretically lost on the position.

Can these calculation be done on single leg options positions?

Yes. The calculations will work for whatever strategy you deploy. But you cannot choose a multi-leg strategy and within that calculate the probability of one leg. This will vary depending on strategy and depending on criteria selected between Chance of Profit, Chance ITM, and Max Loss

Can this calculation be done on stock or is it for options only?

Some of them are exclusively used for options strategies (such as chance ITM) and others are used for options of equities.

Related articles

Trade smarter with automation