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As an investor, I love simple.
Some people take a simple concept and sprinkle it with some
mumbo jumbo to make it seem complicated … and then claim only
they can explain it to you! Don't listen to them … and certainly
don't buy into any such load of bunk!
Take options, for example. Yes, a lot of people - maybe even
your stockbroker - will tell you options are too complicated and
confusing. What they're probably telling you is that they don't
want to understand options, so they don't want you to trade them
Yes, lots of people have joined the ranks of options traders.
But only 10 years ago, just a privileged few investors 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. They were traded only by 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, innovative 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 during their heyday just a few short years
So now that we as self-directed investors have access
to the same technology as professional traders, why aren't we
applying this technology in the same way?
We all know that buying a stock or ETF has only a 50/50
statistical chance of success. But most investors don't know that
they can increase the statistical chance of success well above
50/50. Professional traders do, and they have been using powerful
technology to assist them with an appropriate strategy for years.
But now you and I have the same technology. Now it's up to use it
to our advantage.
One of the more powerful tools offered in today's options
trading software is option theoreticals.
Probability of Expiring
is the most informative data point among the options theoretical
and one that I employ every day for my
Probability of Expiring? It's the chance a stock will close in
the money at options expiration.
So the real question is … how can you use Probability of
Expiring to your advantage?
Say, I believe that the
Russell 2000 ETF (
is currently in a short-term overbought state and the market is
due for a short to intermediate-term correction. As a result, I
want to place a trade that has roughly an 85% probability of
expiring, or as I like to refer it as an 85% probability of
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
Just look above and you will notice that how delta relates to
the probability of success. Basically to find the probability of
success you just take 100 minus the delta.
So, let's look at how we can apply probability of success to
the real world.
IWM has pushed to new highs is currently in a short to
intermediate-term overbought state. Moreover, we are entering the
"sell in May" period.
With that being said, I want to place a bearish trade with
defined risk and close to an 85% chance of success.
A bear call spread fits the bill.
As seen in the option chain above the 98 calls have a
probability of expiring out of the money (OTM) of 83.41%. That
means there was a 16.59% chance that IWM will close below 98 at
June options expiration. In other words, the trade has roughly an
85% chance of success. You want the credit spread to expire
worthless by not pushing above the 98 strike.
A theoretical trade: 98/100 bear call spread for $0.29 (.52 -
.23) for a return of 16.9% if the trade closed at or below
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.
To learn more about capturing 77% probability on all of your
WATCH my FREE Special Webinar this