When we deal with the options market, it is very important to understand the correlation between delta and probability of profit (or delta probability).

This is a powerful concept that will allow us to do things such as calculate probability of option expiring In The Money, which can be quite useful when trading options and specially, for strategies that are selling biased just like the call ratio backspread, the put ratio backspread or the Iron Condor.

Let us begin with the basics then…

What is the option probability of profit?

When we take a look to the option chains looking for a trade to perform, depending on the strategy we want to execute, we must keep an eye over delta and probability of profit, as they are both correlated.

The option probability of profit will tell us the probability of the option expiring in the money.

Or, in other words, if it is likely that our option will expire with intrinsic value and considering the strike price we selected.

How to read the option chain probability of profit?

Many broker platforms offer within the data provided in the option chain, a column that calculate probability of option expiring In The Money. In other words, they will offer the option probability of profit as a data.

Let us take a look at an option chain to check the option probability here.

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In the image above, we can see the option In The Money probability of profit marked with red circles. Those calls that are already In The Money do have a higher option probability of profit, compared to those calls that are not as we could expect.

What can I do if my platform does not offer the option chain probability of profit?

Unfortunately, not every platform will provide us with all the data we want.

However, there is an alternative way to obtain the option probability of profit and that is to use the correlation between delta and probability of profit to replace the last one.

The solution: Option delta and probability of profit

Using delta for our purpose, we will be able to approximately determine the option probability when opening our trade.

Of course, it is not exactly the same value compared to the real calculation.

Nevertheless, it is accurate enough for us to be able to trade using the correlation delta and probability of profit.

How to use delta probability instead of the option chain probability?

Imagine we want to open a trade over a particular stock whose underlying price is $148.63.

Depending on the expiration date, the strike and the implied volatility, as well as option delta, will vary, alongside the option probability.

In the trade, if we picked the strike price of $140 and a 30 day expiration period, we would obtain a delta of 0.711 for the call option, while for the put option, it would be of 0.288.

Using the delta probability, we can extrapolate and tell that our option probability would be around 71.1%.

The same goes for the put option, whose delta probability will be about 28.8%. That is how delta and probability of profit are correlated.

But how accurate is the correlation between delta and probability of profit compared to the option chain probability?

For example, let us look at the following chain, which includes both delta probability and the option chain probability.

If we select the strike price of $105, we will see that the option chain probability of the contract expiring In The Money is 8.13%, while its delta probability is 0.07 points. Making our approach, that would be a 7%.

In other words, comparing both, we have a 1.13 % of difference

If we now choose the $115 strike price, we will see an option probability of 43.59%, while the delta probability is 0.41. That is a 2.59% of difference between both.

As you can see, there is not much difference, and we could be using delta probability without problems.

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What is and how to find high probability option trades?

Using strategies that maintain a delta probability around 80% – 90%, we could assure that our option strategy is very likely to be successful. In strategies like the Iron Condor or the Straddle, the main thing is to look for those delta in which the probabilities are favorable to our trade.

We could trade any option contract with such a delta probability and be almost sure that it will be a winner trade.

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Conclusions about delta and probability of profit

Remember that using delta probability will not provide us with the exact option chain probability.

Still, it will be quite practical if we do not have a platform that provides us with this data.

We can rest assure because delta always comes in the trading platform as a must, so we will be able to use it when needed to correlate delta and probability of profit.

If you want to learn more about the power of the probability of profit, we recommend you to take a look at these two articles here in which we discussed more about the probabilities and this one in which we compared what is riskier, selling puts or buying calls.