Options Trading: Persistence Through Science
Hope doesn’t make for a viable business nor an (options) trading strategy, but persistence will pay for you if odds are on your side.
Remember the two-headed, one tailed coin that we bet heads on?
Pretend that thanks to your knowledge in Quantum Physics, you have figured out a way to make that coin flip in slow motion.
With that trick, you are able to better observe with more precision what is going to happen.
Right now, by the way that the coin is moving, it doesn’t look like you are going to win. Even though odds were on your favor, they were not a definite, sure thing. You did have risk on the table after all.
What can you do now?
When the coin is halfway/mid-air you take that coin away, and flip it again with about the same odds, but you start again at the initial height, giving you more time once again to reach the ground and show “heads”.
This would be similar to “rolling” an option trade.
Standard Tastytrade practice is, after an initial trade is placed around the optimal expiration period (45 days), and time has passed and you have up to 21 days to go, yet you are not winning, the best thing you can do is “flip” again.
You close the initial trade and open a new one, at the same strike (price you committed yourself to buy or sell stock) but at a different expiration. It should be by a further away expiration date in which you “reconstruct”
the trade and get to stand the closest to 45 days to expiration one more time, for example, if the trade was 21 days from expiration so you will choose the closest available option that is 24 days away (45–21=24).
What we are doing there is once again putting time on our side and most importantly, increasing the odds of winning once again.
If it were a normal coin and you were able to do this “re-flip” trick (rolling), what would the probability of flipping heads in two tries?
P1= Probability of Heads in Flip 1 =50% = 0.5
P2= Probability of Heads in Flip 2 =50% = 0.5
So, if you needed to flip twice for George Washington to appear in a quarter dollar coin, the formula is:
P1 + P2 — (P1 x P2) = 0.5 + 0.5 — (0.5 x 0.5) = 0.5 + 0.5–0.25 = 0.75 = 75%
(You subtract “P1 x P2” because this means the probability of flipping Heads in both flip 1 and 2 doesn’t count, in this example you want to know probability of heads either in Flip 1 OR 2)
But with a 68% probability of profit (1 Standard deviation), a little bit more than a two-headed, one tailed coin, would be the following:
0.68 + 0.68 — (0.68 x 0.68) = 0.8976 = almost 90%
Of course, when you do this re-flip, since your odds are better, you will get paid less. But it will be enough to have a small profit or at least cover the loss in the first bet for a scratch.
Passive investing is the perfect definition of blind hope.
You stand there while doing nothing while you could perfectly do something to make your situation better.
The problem is that you don’t for many reasons and the two most important ones that I can think of are:
-You have been led to believe that you can’t do anything about it, when it simply is not true, leading you not to care about studying about Active Investing and;
- What is taught about Finance and Investing is made so difficult to understand in order for people not be able to challenge it, because what is taught mostly is what doesn’t work, in a never ending, confusing misinformation overload.
And you give up. You pass your opportunity to make money and enrich those who want you to keep depending on them for results that never come.
Once again, Tastytrade and Tastyworks are making it easier by:
- Teaching what really works and backing it up with logic and science (data/statistical studies and proven trade mechanics) in a very simple and visual manner and;
- Cutting through the nonsense and tuning out the confusion of the talking heads in Financial Media who either don’t know what they are talking about OR they do know but will say whatever its convenient for them to perpetuate lies that make them richer and you poorer.
Persistence is what will make you successful in the game of trading and investing. Not by virtue of hope, but of science.
Sidenote: Rolling is a best practice for specific undefined risk strategies only, defined risk strategies are better to be left alone.
Originally published at MyTraderJourney.com.