As options traders we have the advantage over other investors.
Why?
Because with each and every trade we have the opportunity to structure positions that can generate profits regardless of market direction. In fact, strategies like iron condors perform perform best when our underlying of choice moves sideways during our stated expiration cycle. More importantly, we have the ability to choose our own probability of success and the only way to do that is through selling options.
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Selling options is a far superior strategy to buying options. So why do so many people choose to buy options? Why is the strategy of buying options so prevalent in the world of options. Is it because they are easy to understand? Probably…they act just like a stock only they are leveraged (1 options contract equals 100 shares). But the industry doesn’t help in the matter. In most cases they just perpetuate the idea that buying options is the ONLY way. I mean, just look at the typical options approval levels at your brokerage. Why do they allow the lowest approval level for arguably the riskiest options strategy?
The industry has shown that most investors who use options buy them out-of-the-money. It is proven that most investors buy options that have a probability of success around 33%. Why? I guess the real question is why are the brokers allowing, better said, encouraging investors to use inferior strategies? We know as options sellers that we can create a statistical edge, in many cases upwards of 80% or more per trade. The high-probability trade doesn’t guarantee profits, but if we are diligent and stick with a strict risk-management plan that starts with proper position-size, we have the opportunity to consistently outperform the market.
Over the coming days I am going to discuss a few different high-probability strategies and how I like to use them in my portfolios at Cabot Options Institute. Stay tuned!