Please ensure Javascript is enabled for purposes of website accessibility
COIMC Logo
Cabot Options Institute Masters Club
FAQ’s
Here are some questions members often ask our analysts or make an important point. It’s a good place to look first if you need an answer to your own question.

What is the law of large numbers?

The Law of Large Numbers states that as you increase your sample size, in our case number of trades, our expected value or probability of success will come to fruition.

This is because the Central Limit Theorem shows us that actual values will converge on expected values.

What is the Best Stock for Credit Spreads?

My crystal ball broke decades ago, so I can’t answer the question with any accuracy.

However, I can tell you how to find the best stock for credit spreads based on a specific set of criteria. In fact, it’s a step-by-step process that I follow with every trade I place.

1. Liquidity

I only trade stocks with highly-liquid options. It just doesn’t make sense to trade illiquid options. There are far too many drawbacks. But the primary drawback is pricing inefficiencies. Basically, you are going to get poor pricing across the board—at the open, any adjustments, and the closing of the trade. It just doesn’t make sense from an efficiency standpoint.

2. Implied Volatility

All stocks have unique implied volatility ranges. I always look at the current implied volatility (IV) of a stock, as it states the expected volatility (movement up or down) of a stock over the life of the option (specific expiration cycle). Don’t confuse that with historical implied volatility, which looks towards the past. Knowing the current IV gives me a good idea on how much premium I should expect to receive.

3. IV Rank

IV rank is an important tool when measuring the current levels of implied volatility in a stock. The volatility measure tells us if the current implied volatility is high or low compared to levels of volatility over the past 12 months.

4. IV Percentile

IV percentile is another important tool for measuring how the current level of IV compares to historical levels. IV percentile measures the percentage of days over the last 12 months that the IV was lower than the current IV.

5. Expected Move or Expected Range

The expected move is the amount a stock is predicted to advance or decline from its current share price, based on the security’s current level of implied volatility over a specific period of time. The expected move vacillates, in real time, based on changes in a security’s price and its implied volatility.

Simply stated, the expected move shows us the future expected range of a security over a specific time frame.