How to judge the exercise probability? Sell Put Must understand indicators
What is exercise probability
Probability of Assignment refers to the possibility of an option being exercised when the option expires.
Simple understanding: the probability that the stock price falls below the exercise price.
- The lower the probability → the smaller the risk of being exercised → the safer it is
- The higher the probability → the greater the risk of being exercised → more caution is required
Experience reference value
| risk level | Assignment probability | suggestion |
|---|---|---|
| 🟢 Green light | < 5% | Don't worry, it's safer |
| 🟡 yellow light | 5-15% | Pay attention to positions and choose targets with good quality |
| 🔴 red light | > 15% | Novices should not touch it, but veterans should also control their positions. |
The core of Sell Put is not to pursue high returns, but to control the probability of exercise.
Influencing factors
- The distance between the underlying price and the exercise price
The farther the distance (the higher the degree of virtual value), the lower the probability of exercise.
For example, the current price of AAPL is 190, and the exercise probability of Sell Put 180 is significantly lower than that of Sell Put 185.
2. Remaining expiration time
The longer the time, the greater the uncertainty and generally the higher the probability of exercise (other things being equal).
3. Implied volatility (IV)
The higher the IV, the greater the range of stock price fluctuations and the higher the probability of exercise.
If IV soars before the financial report, the probability of exercise will also increase.
4. Dividends and interest rates
Dividends increase the value of the Put option, indirectly affecting the probability of exercise. Interest rate changes will also have a small impact.
Hyperstock How to calculate
We make comprehensive estimates based on the following models:
- Delta Approximation method: The absolute value of Delta can be used as an approximate estimate of the exercise probability
- Lognormal distribution model: Based on the Black-Scholes framework, it is assumed that the stock price follows a lognormal distribution
- Volatility Surface Adjustment: Accounting for IV Differences in Different Strike Prices and Expiration Dates
- Historical data backtesting: Calibrate the model based on historical exercise data
In the Hyperstock analysis results, the exercise probability is displayed directly next to each contract. You don’t have to do the math yourself.
Practical skills
- Red line for newbies: Only do contracts with an exercise probability < 5%
- Advanced players: 5-10% is acceptable, but positions must be strictly controlled
- Avoid the IV surge period: before financial reports and major events, the exercise probability will be distorted
- Don’t just look at the exercise probability: make a comprehensive judgment based on annualized income and Score