How to Estimate the Probability of Maximum Loss

Use this simple decision recipe to estimate the probability of taking the maximum loss on an options trade.
Kirk Du Plessis
Mar 24, 2021

It’s great to know how much you can make on a trade, but it may be equally beneficial to filter for trades with a low probability of experiencing the maximum possible loss. The decision recipe for evaluating opportunity probabilities allows you to determine a position’s likelihood of profit to filter for opportunities when adding new positions. This enables you to analyze the probability a position will be profitable, in-the-money, or a max loss at expiration.

It is important to remember that this is just an estimate based on current market conditions and a normal distribution, but markets do not always behave “normally.” Still, this powerful recipe will ensure that an order only goes to the broker if the probability of maximum loss is below your predefined level. 

The bot automatically factors in the credit or debit of the position, where the stock is currently trading, and how much extrinsic value, such as time until expiration and implied volatility, is priced into the option contracts.

You no longer need to monitor deltas and probabilities manually to identify trade opportunities. The bot checks a position’s probability when you precede criteria with this decision recipe in the automation editor, so you can be confident using quantifiable probabilities when building out a position.

No tags found.

Trade smarter with automation