I placed a JUN 135/140 bear spread on AAPL two days ago for a credit of 0.15. As of today, I don’t think those options are even trading two days later, the price fell too far. It doesn’t even come up on my screen, and it didn’t trade yesterday.

If I could get a trade, it would not even be worth it to close it out. They expire of Friday, and it would take a 4σ ( σ = standard deviation ) for them to make it into the black. Something like a 1 in 10,000 chance or something like that. I didn’t bother to calculate it. They are just going to expire worthless and save me the commission.

That is the whole point of the 68-95-99.7 Rule when making vertical spreads. If you place your spreads @ 1σ, then you have a 84% chance of a profitable trade. Since σ calculates both appreciation and depreciation, we only need to be concerned about half, giving us a free ride on the other 50% probability. 1σ / 2 + 0.50 = 84%. And yet another use for my Standard Deviation spreadsheet.

I love math.

The 68-95-99.7 rule states that for a normal distribution, almost all values lie within 3 standard deviations of the mean.

About 68% of the values lie within 1 standard deviation of the mean (or between the mean minus 1 times the standard deviation, and the mean plus 1 times the standard deviation). In statistical notation, this is represented as: μ ± σ.
About 95% of the values lie within 2 standard deviations of the mean (or between the mean minus 2 times the standard deviation, and the mean plus 2 times the standard deviation). The statistical notation for this is: μ ± 2σ.
Almost all (actually, 99.7%) of the values lie within 3 standard deviations of the mean (or between the mean minus 3 times the standard deviation and the mean plus 3 times the standard deviation). Statisticians use the following notation to represent this: μ ± 3σ.

http://en.wikipedia.org/wiki/68-95-99.7_rule

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This entry was posted on Wednesday, June 13th, 2007 at 9:14 pm and is filed under Option Trading.