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Unfortunately, it is not only the matter of probability

Options Trading

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I often hear from beginners that…

I often hear from beginners that they like to deal with options, because those are easy to trade with high probability. If only this is attractive for you, you’re on the wrong track. Let's see why...

One of the biggest advantages of options trading is non-directional trading. For example, you can earn money in the 90% range, if the underlying product remains within the range.

This attracts many people, and I can understand why.

Unfortunately, the 90% probability itself is not worth much. In a previous article, I explained the topic of hit rate, payoff ratio and expected value, so I will not repeat it here. However, let’s talk a little about probability and the management of it.

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Why is a 90% probability not attractive in itself?

That's because it does not necessarily mean that you can make money consistently in the long run. Many people think that a 90% probability exists only in the world of options. This is a misconception.

Let me give you a very simple example: I write an automated software that trades Forex with a TP of 10 pips but the SL is 100 pip. In this case, the hit rate, the probability of profit will be very high, but it is not sure at all that the strategy itself has a positive expected value. If the individual loss is 10x higher than the profit in above the example, you need to compensate for this with the hit rate so that a positive expected value can be achieved. But that’s always questionable, isn't it?

So, is there is a 90% probability outside the options market as well? The answer is yes, but this does not necessarily mean that you will be profitable. The probability itself does not say anything about the profitability of the strategy.

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Management of Options probability

If you trade the 90% range that I mentioned so many times, but you do not manage the position, the expected value can be negative, such as in case of the Forex example.

That means: it is not of primary importance whether the probability is 90% or 95%, but how you manage the position, how you can convert it in the meantime if the price is moving towards the edge of the range and the floating loss is increasing.

However, it is not enough to know what Call and Put are, you have to learn much deeper options rules and how to apply them in practice, too.

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Probability vs. risk?

Consistent high probability is always accompanied by either low profit or high risk. The scenario of high probability, high profit and low risk does not exists. I wish it did :-).

So, if you want to trade with high probability and yet you want to earn money with it, you should manage the risk with conscious awareness.

There is no other way.

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There is no free lunch

Whether you trade direction or channels, the essence is the positive expected value. If, for example, the probability of profit is only 30%, but your average gain is much higher than your average loss, the expected value can also be a positive, regardless of having loss in 70% of the transactions.

The same is true for non-directional trading as well: despite a 90% probability of profit, if the losses are significantly bigger than the gains (because you did not manage the position in the meantime), the expected value of this can be also negative, that is, you're going to lose with it.

Either way can work, you only have to act deliberately. The key is to know the cornerstones of your strategy, to manage risk and to watch the expected value. Do not act in haste, do not change the strategies very often, be disciplined and persistent. Only this will bring the desired results!

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Feel free to ask me!

Email: gery@optionsrules.comMy webpage: http://www.optionsrules.com/

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