Something that new option traders learn early on is that one of the thingscan tell you is the estimated probability that the option will expire in-the-money (ITM).
For example, an option with a Delta of 16 (onehas an approximate 16% chance of expiring ITM. This and more on Delta can be found in the Best Practices segment . Calculating the probability of touch is simple. Theoretically, it should occur twice that of the option's Delta, so that option with a 16 Delta would be "touched" 32% of the time according to theory.
The segment of Market Measures,tested the accuracy of using delta as a proxy for an option expiring ITM and being touched prior to expiration. The theoretical values were slightly above expectations in both instances. A 16 delta option theoretically has 32% chance of expiring ITM but in reality the number was around 27%. The difference provides opportunity for .
It's also important to recall the role thatplays. An option with a Delta of 35 may have a theoretical probability of being touched of 70%, but the time decay will often result in such an option still being a loser for the buyer.
Watch this segment of “Best Practices” with Tom Sosnoff and Tony Batista for the valuable takeaways and other important information related to Delta and the Probability of Touch.