People make money by trading options

Probability of Winning Options Trading: Gain a Statistical Edge

In stock market trading it is sometimes like in poker: some traders or players act instinctively, for fun, without attaching great importance to the statistics. Other, those who are dying to win, are sure (and rightly) with Probabilities employ.

In options trading, you will only be one of the winners in the long term if you familiarize yourself with the chances of success of your trades.

Some investors spend hours analyzing charts before executing a trade. Others act out of instinct or because they are being influenced by news about a stock. Two investors can open a trade for a variety of reasons that, for example, bet on a rising stock. However, both trades can be completely different in terms of the probability of winning.

The Carefully analyze the probability of winning in advance, is the be-all and end-all of making intelligent and success-oriented trading decisions.

Importance of the probability of winning when trading options

The probability of winning is in English technical jargon as "Probability of Profit"And with"POP“Abbreviated. If you do research on the Internet about options in the English-speaking world, you may come across this abbreviation.

For a trade or strategy, the probability of winning corresponds to the chance that you will start the trade by a certain date (for example, the expiration date of the option) at least EUR 0.01 profit will achieve. Experts use the following definition in options trading: the probability that an option will expire in the money or out of the money, depending on whether you are the buyer or the seller of the option.

The probability of winning will fluctuate daily after the trade is opened. It depends, for example, on how high the implied volatility of the stock is and how many days are left until the expiration date.

With pure stock trading, your theoretical profit probability is always 50%. You make a profit as soon as the stock moves up by 0.01 euros. The chance that it will take this direction is exactly 50%. In options trading, depending on your strategy, you will do this The probability of winning can increase dramatically.

An important factor for the probability of winning: the time value

The time value is that part of the option's value that is linked to the remaining term of the option and the implied volatility. It differs from the option's intrinsic value, which is based on where the share price is compared to the option's strike price. The value of an option that is out of the money is 100 percent fair value.

When the option expires, the fair value is 0. The profit or loss of an option trade depends on whether or not the option has an intrinsic value when it expires. Option sellers want their options to have an intrinsic value of zero at the expiration date, while option buyers want as high an intrinsic value as possible at the expiration date.

The Time value has a major influence on the probability of winning for the option seller and the option buyer. Let's look at a specific example of how the time value affects the chances of the option seller and the option buyer.

Probability of winning for the option seller

Options short sellers benefit from the option being quoted out of the money at the expiration date. In the case of a put option, this is the case when the share price is quoted above the strike price of the put at the end of the option's term. A call option is out of the money if the share price is below the strike price of the call.

The short seller retains the premium in any casethat he received when he opened the trade.

As an example, consider Disney stock. For example, suppose a trader is optimistic about the performance of that stock. For example, the stock is trading at $ 138.30. The trader decides to sell a put option with a strike price of $ 125 and earns a premium of $ 112 per contract