I am not new to trading, but I am recently looking into exploring more elaborate option strategies.

Can someone explain to me why these things aren't "sure things"?

Example - Buy Jan 11 Condor (Buy 69/72 calls, sell 70/71 calls)

TOS says the "Break even is 69.09 / 71.91" with a Max Profit of $910 and a Max loss of $90 + commission.

That is 10:1 - why wouldn't people make these bets all day long? I mean 10 to one is pretty darn good, even as a freakn' gamble no?

If I understand a Condor, this only pays if IWM is between 69/09 and 71.91 at Jan 2011 Opex.

I guess NOBODY believe it will be here, which is why the trade is so "cheap"?

Anybody have to time to explain this to me?

Thank you!!!

volatility

The focus should be on expected return (the probability of each outcome times the payout for that outcome, summed over all outcomes), rather than the ratio of maximum profit/loss.

A lottery, for instance, has a very high maximum profit and very low maximum loss, and indeed people do place those bets all day. But the expected return is not positive (for the players!).

Thanks, I see a lot possible trades that have a Max Profit of say $500 and a max loss of say $1000.

Can to share any pointers (or links where I can read) on how to use TOS to see probabilities?

Also, it is annoying to me that the "Break Even" numbers on the ToS trade summary screen don't say if it break even on the inside or outside. They assume I should just know, and that's fine... but wouldn't it be nice if they just told you. This would clear confusion when selling these things.

The probabilities are up to you my friend, but the market may not see them the same way.

^^^

What I meant last night was that there is likely no purely mathematical edge to be gained against the market pricing of the option.

You could empirically estimate these probabilities, by fitting a distribution of the daily percentage returns (either normal or something with fatter tails, if you prefer), using some estimate of the variance, and then running many thousands of simulations sampling from that distribution to obtain price paths to option expiry.

But you're making a lot of assumptions to arrive at those numbers, including no change in the volatility over time, no early exercise of any portion of the trade, and the nature of the distribution itself.

And you're likely to find that the expected return is essentially zero.

So your market view is likely the more important factor.

A purchase of a fly/condor is implicitly as sale of volatility. The price is generally a function of theta and are purchased primarily as decay strategies. They increase in value as an options characteristics transition from theta (time-premium) to delta (proximity to underlying). Theta being high in longer-term options (and assuming skews are fairly normal) you may purchase/sell the two verticals that constitute a fly/condor at seemingly cheap prices, understanding that as the option decays the nearer-the-money options maintain some value (gamma, delta) relative to the wings. These probabilities are priced in, and these structures should be entered when skews make the price compelling.

Wow Pat's answer made my brain hurt which is why I don't do options.

10 to 1 pretty darn good?

Uh no, but in this volatility environment that's about standard

also, learn how to use probability of expiring (for me I use Delta)