API Computation Metrics

Introduction

FlashAlpha's API provides production-grade quantitative metrics for options trading. This guide explains every computation metric returned by our endpoints, including the mathematical foundations, practical interpretations, and strategic applications.

Who This Guide Is For:

• Quantitative Traders: Deep mathematical explanations and edge cases
• Systematic Traders: Integration guidance and metric dependencies
• Retail Traders: Plain-English interpretations and actionable insights

Expected Value (EV) Metrics

Expected Value is the cornerstone of profitable options trading. Our EV calculations go beyond simple probability-weighted outcomes to incorporate real market dynamics.

EV (Expected Value)

What It Is: The dollar amount you would expect to make (or lose) on average if you executed the same trade thousands of times. A positive EV indicates a statistical edge.

Mathematical Definition:

EV = Σ [P(outcome_i) × PnL(outcome_i)]

For continuous distributions:

EV = ∫ P(S_T) × PnL(S_T) dS_T

Where:

• P(S_T) = Probability density of stock price at expiration
• PnL(S_T) = Profit/loss at that stock price
• Integration spans from 0 to ∞

API Response Example:

{
  "ev": 42.50,
  "ev_currency": "USD"
}

How FlashAlpha Calculates It:

1. Extract implied probability distribution from options market
2. Apply volatility risk premium adjustment
3. Calculate P&L at 100+ price points across the distribution
4. Integrate using numerical methods (Simpson's rule)
5. Subtract estimated transaction costs

What To Look For:

• ✅ Positive EV: Trade has statistical edge
• ⚠️ Near-Zero EV: Edge may not survive transaction costs
• ❌ Negative EV: Avoid unless hedging

EV Percentage (EV%)

What It Is: Expected value expressed as a percentage of maximum risk. This normalizes EV across different position sizes and strategies.

Mathematical Definition:

EV% = (EV / Max Risk) × 100

API Response Example:

{
  "ev_percent": 8.5,
  "max_risk": 500
}

Why It Matters: Comparing a $50 EV on a $500 risk trade vs. a $50 EV on a $5,000 risk trade reveals drastically different risk-adjusted returns:

• Trade A: $50 / $500 = 10% EV
• Trade B: $50 / $5,000 = 1% EV

Trade A is 10x more capital efficient.

Benchmark Values:

EV at Bid, Mid, and Ask

What They Are: EV calculated at different fill prices, accounting for bid-ask spread impact.

API Response Example:

{
  "EVMid": 25.5,
  "EVAsk": 18.3,
  "EVBid": 31.2
}

Why This Matters: The bid-ask spread directly impacts your realized EV. Use these metrics to understand the range of outcomes based on your fill price.

The Greeks

Greeks measure how option prices change in response to various factors.

Delta (Δ)

Definition: Rate of change of option price with respect to underlying price.

Delta = ∂V/∂S

• Calls: 0 to 1
• Puts: -1 to 0

Theta (Θ)

Definition: Rate of time decay per day.

Theta = ∂V/∂t

Positive theta = You benefit from time decay (premium sellers)

Vega (ν)

Definition: Sensitivity to volatility changes.

Vega = ∂V/∂σ

Higher vega = More sensitive to IV changes

Gamma (Γ)

Definition: Rate of change of delta.

Gamma = ∂²V/∂S²

High gamma = Delta changes rapidly with price movement

Probability Metrics

Probability of Profit (PoP)

What It Is: The likelihood that a trade ends with any profit at expiration.

PoP = P(PnL > 0)

Probability of 50% Max Profit (P50)

What It Is: Likelihood of achieving at least half of maximum potential profit.

Probability of Touch

What It Is: Probability that the underlying will touch a given strike before expiration.

Volatility Metrics

IV Rank

Definition: Where current IV sits within its 52-week range.

IV Rank = (Current IV - 52w Low) / (52w High - 52w Low) × 100

IV Percentile

Definition: Percentage of trading days with IV lower than current.

Historical Volatility (HV)

Definition: Realized price volatility over a lookback period.

• HV20: 20-day historical volatility
• HV60: 60-day historical volatility

Risk & Reward Metrics

Max Risk

Definition: Maximum possible loss on the trade.

Max Reward

Definition: Maximum possible profit on the trade.

Reward/Risk Ratio

Definition: Ratio of max reward to max risk.

R/R = Max Reward / Max Risk

Breakeven Points

Definition: Underlying price(s) where the trade has zero profit/loss at expiration.

Practical Trading Applications

Metric Priorities by Strategy

Portfolio Construction

Use EV% for position weighting:

• Higher EV% trades receive larger allocations
• Diversify across underlyings, expirations, and strategies
• Monitor aggregate Greeks for portfolio risk

Trade Selection

Minimum thresholds for trade consideration:

• EV% > 3% (after commissions)
• PoP > 50% for income strategies
• IV Rank > 30 for premium selling
• Sufficient liquidity (tight bid-ask)