3 Ways to Use Delta: Probability Approximation
Update: 2025-10-02
Description
In this educational session of From Theory to Practice, Jim Schultz continues his deep dive into Delta by explaining how traders can use it as a probability gauge - the second most common application beyond the textbook definition of measuring option price movement.
Delta serves as an excellent probability approximator in two key ways:
1. **Probability of expiring in-the-money**: This explains why traders typically select 30-35 delta strikes for short options strategies. The inverse (1 minus delta) indicates the probability of expiring out-of-the-money - crucial for premium sellers.
2. **Probability of touch**: Calculated as two times the delta, this measures the likelihood that a price level will be reached at some point before expiration, helping traders assess potential market movements.
Delta serves as an excellent probability approximator in two key ways:
1. **Probability of expiring in-the-money**: This explains why traders typically select 30-35 delta strikes for short options strategies. The inverse (1 minus delta) indicates the probability of expiring out-of-the-money - crucial for premium sellers.
2. **Probability of touch**: Calculated as two times the delta, this measures the likelihood that a price level will be reached at some point before expiration, helping traders assess potential market movements.
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