In my latest webinar “Create Your Own Odds: the High-Probability Trade for Consistent and Easy Income” I discuss the most overlooked aspect in all of investing/trading……probabilities.
Probabilities allow the self-directed investor the ability to choose trades with a proper return on capital while creating a risk profile that suits each individuals needs. Basically, when using options appropriately you are able to choose your own probability of success.
Trading stocks only has a probability of success of 50%. I harp on this statistic all the time, but for some reason self-directed investors can’t comprehend the magnitude of that number.
Below is the chance of having three profitable trades in a row given the probability of success.
The 33% represents the typical out-of-the-money trade that a retail options trader makes. As you can see the probability of success is already only 33% to start and to try to successfully make that type of trade 3 times in a row…well you are better off going to Vegas.
As for the 50% trade, that is your typical stock or futures trade, essentially a coin flip. As you can see to obtain three successful trades in a row you only have a 12.5% chance. Again, not good. So the question is why do so many investors/traders choose to participate in something that is statistically a loser from the onset. Yet, most investors choose this route. They choose to enter into something that is inherently a loser. It makes no sense.
Only when you get to a probability of success 85% and greater do you start to see the true advantages of using a probability of success for each and every trade you place.
Probability of Success
- Probability of Success = 90% 3 in a row = 72.9%
- Probability of Success = 85% 3 in a row = 61.4%
- Probability of Success = 68% 3 in a row = 31.4%
- Probability of Success = 50% 3 in a row = 12.5%
- Probability of Success = 33% 3 in a row = 3.6%
But again, most investors/traders ignore the advantage of investing with probabilities. And this is why most traders fail.
Editor and Chief Options Strategist
Options Advantage and The Strike Price