The talking heads in the financial media aren’t very much concerned with your long term investing success. They only care about convincing you to stay in the market at all times and fixated to their analysis for the latest market movements.
When you hear someone else getting excited about a trade, it can be hard to control your urge to get in as well.
It’s the incessant idea that you’re MISSING something that will make you poor if you let it. They’ll convince you that no opportunity is too great to miss out on.
Believe me, there will always be opportunities in the marketplace.
Don’t succumb to the once in a lifetime trade syndrome, because it creates forced trades and inevitable failure over the long-term. Patience, patience, patience. Patience and position-sizing are the keys to trading success.
Remember, the market doesn’t care about you, nor does it know about what price you are long or short. You are just along for the ride trying to make some sense of the options market.
And most self-directed traders and investors continue to search, to no avail, for that special sauce, that indicator, that Holy Grail or trading strategy that will work like an ATM.
I hate to burst anyone’s bubble, but the cash machine doesn’t exist in the world of trading. It never has. The market is a set of occurrences, with patterns that allow us to apply the most appropriate options strategy to harness the opportunity at hand. Remember, there are no set rules of movement, anything can happen, and it is imperative that you always keep that in the back of your mind.
The good news is that with some solid basic knowledge of options you can create realistic strategies for realistic returns. And creating realistic strategies with realistic returns, along with patience and position-sizing, will make you a successful options trader/investor. It takes some commitment, but believe me it is well worth the effort. Options ARE the investment equalizer, that’s how I use my Options Advantage service.
I will discuss all of the aforementioned ad nauseam. But, one thing I will not do is dumb down my writing to you. You are all smart. Options traders are known as the upper echelon of investors and you are one of them. It is my intention that through repetition you will grasp what only a handful of investors understand.
Ideas from the Trade Arena
Back in the early part of the 1900s, the automobile was strictly for the richest of the rich. It was an entirely new and novel invention and you basically couldn’t own one unless you had a large amount of money (and patience) at your disposal.
But within a decade, that all changed. The automobile became the province of nearly every one.
In 1900 only 8,000 automobiles were registered.
Within 10 years, that number increased by a factor of 39 as over 300,000 automobiles hit the roadways.
And by 1920, the number ballooned to 9.2 million automobiles.
Imagine for a second, in a 20 year span a 1,150 fold increase in automobile ownership. It’s almost mind-boggling to contemplate a world where in just 20 years Americans when from getting around by foot, horse, or train to enjoying the freedom offered by the automobile.
Today, the options world is a lot like the automobile world of 1910.
Yes, lots of people have joined the ranks of options traders. But only ten years ago, it was just a privileged few investors who could take advantage of things like streaming quotes and real-time options chains. Options were shrouded in mystery and deemed too complex for the average Joe – to be traded only by the so-called “sophisticated” professional investors.
Since then, however, seismic changes in the options world have leveled the playing field for individual traders and investors. Thanks to advances in technology, innovation trading tools, and better access to what was once privileged information, the self-directed investor is now in the same position as the Wall Street fat cats were during their heyday – just a few short years ago.
So, now that we as self-directed investors have the same technology as professional traders why aren’t we applying the technology in the same way?
We all know that a stock or ETF only has a 50/50 statistical chance of success. But, what most self-directed investors don’t know is that there is a way to increase the statistical chance of success to well above 50/50. Professional traders do, and they have been using powerful technology to assist them with an appropriate strategy for years. But, as I stated before, now we have the same technology. Now it is up to use it to our advantage.
If I could choose one of the more powerful tools offered in today’s options trading software it would be the option theoreticals offered. Probability of Expiring (ITM or OTM) is the most informative data point among the options theoretical and one that I employ every day for my readers with Options Advantage.
Probability of Expiring is the chance that a stock will close in-the-money at options expiration.
So, the real question is, how can we use Probability of Expiring to our advantage?
Say, I believe that SPY is currently in a short-term oversold state and the market is due for a bounce and I want to place a trade that has roughly an 85% probability of expiring, or as I like to refer it as the probability of success.
I realize that some of you do not have access to trading software that gives you the probability of success, but any worthy trading software will provide you with the delta of any given option.
Just look above and you will notice that how close the delta is to the probability of success.
So, let’s look at how we can apply probability of expiring to the real world.
Back in December, SPY had pushed to new lows and was in a short-term oversold state. Moreover, the last two weeks of December were historically bullish.
With that being said, I wanted to place a bullish trade with defined risk with an 85% chance of expiring out of the money.
A bull put spread fits the bill.
As seen in the option chain above the 110 puts have a probability of expiring in the money of 15.59%. That means there was a 15% chance that SPY will close below 110 at January options expiration. In other words, the trade has an 85% chance of success because you want a credit spread to expire worthless by not falling below the 110 strike.
I sold the 110/108 bull put spread for $0.26 (.83 – .67) for a return of 14.9% if the trade closed at or above $110.
Not bad for a trade that has an 85% probability of success. That’s about the success probability that I look for with every trade in my Options Advantage service.
If you choose a trade with a lower probability of success, such as 67% (right at one std. deviation or 68%) you will be able to bring in more premium with less capital at risk. But, it is important to realize that when you give up probability for premium your chance of success declines.
Simply stated, the greater the risk, the greater the gain. You must always take that into consideration because is it worth making an extra 10% to give up 20% in your probability of success? Sometimes yes, sometimes no – it truly depends on your risk profile and conviction.
No glitz or glam here – just straight trading. Today, we’re at a special time in history. I think we’ll see options trading absolutely explode over the coming decade. Early adopters like you and I will be sitting in the driver’s seat as wave after wave of novice options investors come into the fold.
Keep your eyes on the probability of success and together we’ll grow our income in the coming years.
As always, if you have any questions please do not hesitate to email me at [email protected]. Or check out my service, where we have $25,000 in real money on the line, at optionsadvantage.wyattresearch.com.
Editor and Chief Options Strategist
— Andy Crowder - Options Advantage