Computing Expected Returns On Options Strategies by Douglas Lyon, PhD
With the many strategies you can trade, computing expected returns can be tedious. Using one strategy as an example, we look at how calculating maximum proﬁt and loss plus factoring in the probability of proﬁt can identify proﬁtable statistical arbitrage opportunities.
The basic probability assumption (BPA) assumes that all probabilities for all outcomes of any given experiment must sum to 1 and that the probabilities are known with 100% certainty. The statistical arbitrageur knows that the BPA is without foundation and that there is a nonzero probability of losing money for any given trade ...