Options – Using probability in your favor

Using options as leverage

If I ask you where could you buy something for 10% of the price and still profit from its 100% price move, would you have an answer? Well, options have that, but like we pointed before, LOW-PROBABILITY trades have that. The problem with out-of-the-money (OTM) - where the strike price is above the underlying current price – is that they are commonly seemed as highly speculative and highly leveraged trades. The first part of this sentence is indeed true: they are highly speculative and highly leveraged. The problem lies in the second part of the sentence: trades. They shouldn’t be called trades, the right word for that is one and only one: GAMBLE. That’s it! Gamble.

Camouflaged gambling

People don’t realize it, but they are gambling all the time when they risk their money on these low-probability trades. They only see the big upside potential and say to themselves “Oh, it is a small loss if I’m wrong”. But over time those losses would account for a big one plus you have to bear in mind that all that time that you were losing “small”, you could have been winning small. So which one do you prefer: win small or loose small? I have no doubt about my choice.

What kind of trade to pursuit

Close to expiration and far out-of-the-money (OTM), are low probability trades that people tend to focus on. But we, as smart traders, want to take the other side of these low-probabilities trades and turn them into high-probability trades that WILL make us money in the long run. We are not aspiring here to hit the “BIG ONE”, to hit the home run. No. We want the small, high-probable and more certain gain that sums up with compound interest over time. Those are the kind of trades we want to take. Selling options can be a really successful strategy because of its high-probability, but you have to know what you are doing and deeply study all it takes to be successful at it.