Tackle Today: Probability vs. Payout
February 16, 2022
«Picture a teeter-totter.»
Traders, Coach Tyler here.
The longer I trade, the more impressed I am by the efficient and straightforward nature of the market. It offers trade-offs but never something for nothing. Take probability and payout, for instance. Raising one will necessarily lower the other. To be clear, I’m talking about the probability of profit versus the potential reward.
Allow me to explain what I mean by comparing three common positions: long stock, covered calls, and naked puts.
① Long Stock: Probability of Profit = 50%. Unlimited Reward
Wouldn’t it be nice to elevate that probability of profit to 60%? You can, but there’s a cost. You’ll have to limit your reward. Suppose you sell a 40 delta covered call. The stock position would shift to something like this:
② Covered Call: Probability of Profit = 60%. Limited Reward (let’s say $500).
Now, let’s lift the probability to 80% by selling a 20 delta naked put.
③ Naked Put: Probability of Profit = 80%. Limited Reward (let’s say $100).
Do you see what happens? You increased the probability of profit, but in so doing, you decreased the amount of profit.
I view long stock, covered calls, and naked puts as birds of a like feather. They’re all similar bullish positions that offer different probabilities versus payouts.
Isn’t it wonderful that we have so much control over the trade metrics depending on how we structure the position?
Chart of the Day: Metals & Mining ETF goes BOOM!
Metal stocks are riding the inflationary wave. XME just blasted through major resistance, completing a six-month basing pattern. You know what they say – the longer the base, the higher in space.
Video of the day: Gino’s Gems: How to use StockCharts Seasonality Tool
In today’s Gino’s Gems, Coach Gino Poore teaches how to use Stock Charts Seasonality Tool.
Today’s line up
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
The Coaches Show Replay
If you missed last night’s episode where Coaches Mark Justice and Greg Holmes talked about Portfolio Protection or would like to watch it again, check it out here.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day, and fun in a way that only Matt and Tim can deliver.
Trade Masters 7:00 PM EST
Every Wednesday at 7 PM EST join us on the Trade Masters where two Coaches go head-to-head to see who can find the best trading setup.
Cash Flow Condors MasterMind Group 8:30 PM EST
The Condors for Cash Flow system is a high probability option selling strategy designed to generate passive income over time. Join us tonight to go over next month’s orders.
Trading Justice 463: Swing Trading with Options
In this episode, Coach Tyler Craig teaches the principles of swing trading with options during our feature presentation. Swing trading is a commonly used time frame for many traders, and options are the product that traders love to learn about because of their complexity, reduced cost, and leverage.
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