*in gambling parlance) is the house cut on a bet pay-out. if there is a theoretical even-money payout on a bet then, by decree, the house always pays a little less. this way the house creates a sustainable business*

**vig****because their**

*without charging fees,**ratio is engineered to be less than their*

**risk/reward***ratio (more on this below.) now the fact that brokerages do charge a fee for play, i.e. the commission, maybe implies that their vig is not so certain or as big as the casino's. to be able to judge what a brokerage's*

**win/loss***vig*is at all you would need a way to determine even-moneyness, which when it comes to pure stock pricing is as subjective as it gets. however, for certain kinds of option trades, namely

*, it is possible to calculate a theoretical even-money price using the thinkdesktop analyze tab. here's how:*

**vertical spreads**bring your perspective vertical spread into the analyze tab by setting up a trade in the trade tab and then select

*analyze duplicate*trade in the drop down you get from clicking the button just to the left of the trade on the

*trade*tab (make sure the price lock is in the unlocked position so you get the mark, or mid-bid/ask, price for the spread.)

gld credit vertical in trade tab |

*slices*are set to

*break-even*on sept. 22 (the saturday after friday expiration.)

gld credit spread in analyze tab |

now, for a debit spread the calculation is slightly different. i take the probability of

*winning*and multiply by width of the strikes thus: .39 * 1 = .39 as shown below for the buy-side of this same spread:

gld debit vertical in analyze tab. |

geeky mathematical aside:

an even-money trade occurs when the win/loss ratio equates to the risk/reward ratio or:

(1)if i am trading even-money then there is no free lunch. if i win frequently then i should lose big on the occasional loss OR if i lose frequently then i should win big on the occasional win.win/loss = risk/reward

(2)this is the definition of a the vertical spread. the expiration price of the spread can be no greater than the strike-price differential between the short and long option. thus reward+risk must equate to strike price width.risk = strikewidth - reward

(3)something's gotta happen, a win or a loss. i discount the miniscule chance that the price of the underlying is exactly the break-even price at expiration - that's a little like the chances of a flipped coin landing on the edge.win probability = 1 - losing probability

now, by substituting (2) and (3) into (1), i get:

(4)now, by dividing each term of the parenthetical expressions in (4) by the respective divisors, i get:(1 - loss)/loss = (strikewidth-reward)/reward

(5)finally, by adding 1 to both sides of (5) and solving for reward, i get:1/loss -1 = strikewidth/reward -1

(6)this is the math of the method of finding the even-money price of a credit spread that i demonstrated above.reward = strikewidth*loss probability

if your eyes haven't glazed over from the sheer geekiness of the above, relatively simple, high school algebra, then, you might find it a worthy exercise to show that:

(7)risk = strikewidth*win probability

the even money price of a debit vertical.

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