9 Lesson Option Course

Lesson 6 - No Guesswork.

I don't need to guess which way a stock will move, or use fancy technical or fundamental analysis. Don't need to know how to read the MACD or Stochastic or other indicators. I use simple statistics to figure my probabilities and can manage my positions using concrete math, not voodoo or guesswork

Do you understand support and resistance? If yes, good. If not, no problem. I don't use support and resistance much to choose which options to sell. Instead I use statistics.

In statistics there is a term called standard deviation. I am not going to get too technical here. If you need more info on standard deviation you can look it up.

Basically you do a mathematical calculation to find the standard deviation of a stock or index based on how much its price has moved up and down in the past.

So let's say IBM is trading at 50, and it has a standard deviation of 5. Using what I know about statistics I call tell you that for the next 30 days there is a 68.27% probability that IBM will stay between 45 and 55. I can also tell you that there is a 95.45% probability IBM will stay between 40 and 60. And that 99.73% of the time IBM will stay between 35 and 65.

Once I know the standard deviation I can determine a range of options that I would like to sell. I then look at the delta of the various options along with the credit I would receive from each one. I like to have a very high probability of success on my trades. So I will choose options about 1.5 standard deviations away from the current price. This puts my probability of success at 75-85% in most trades.

Pretty cool huh?

Do you think you could make more money, if you were right 75% of the time?

When I first learned that you could have such a high probability of success, I thought I had found the Holy Grail. But there is a catch. With less risk, there is also less reward. So on an Iron Condor trade you can only make about 10%. On a butterfly trade we aim for 20%. If you just buy options, you can double, triple, or more your money in a few days. But that is a very rare occurrence and the odds are against you. I'd rather be the casino letting people gamble and making money consistently month after month. Plus, 10% a month is not too shabby. Warren Buffet averages only 2% a month.

IIn our next lesson I will show you how we limit our risk. You might have heard that selling options is very risky. Not the way we do it.

Let's Go to Lesson 7