Last update: August 2021

Once upon a time, I wrote guest articles for an options focused magazine. One of the features I contributed to was titled “Wolf Against the World.” It involved a pro/con discussion on a particular topic such as buying extra insurance for an Iron Condor portfolio or the merits of using one options strategy every month versus multiple strategies.

Mark Wolfinger, author of The Rookie’s Guide to Options, took one side of the argument while I took the other. It was an enlightening and thought-provoking exercise that helped me to really understand that the world of trading is far from black and white. Instead, the answer to virtually all questions is “it depends.” And to fully understand the complexity of the Street we have to realize all roads fork and fork again. And every path involves a trade-off of sorts.

The inspiration for me bringing up this point came from Tackle Trading’s very own clubhouse. If you haven’t been using it or at least following along from time to time on the questions and comments posted there, then you’re missing out. One thread featured an interesting back-and-forth between Adam and David involving a handful of essential trading ideas. I commend both traders for sharing their thoughts and experiences in a forum where their fellow traders can benefit from the logic and rationale laid out.

Some fundamental questions were on display such as:

• Is it better to buy options or sell them?
• Is it better to focus on gaming direction or time decay?
• Are high probability, low reward trades better or are low probability, high reward trades?

As with all things in trading, there aren’t definitive answers. I know some traders are successful at garnering profits by trading directionally with low win rates but favorable risk/reward ratios. But I also know some traders reach success by focusing on options selling strategies with high win rates but unfavorable risk/reward ratios.

The math component is straightforward in both cases. If the sum of the winners is greater than the sum of the losers then VOILA! you’re profitable. And you can create said profits with low risk/high reward trades AND high risk/low reward trades once adjusted for probabilities.

It’s inaccurate to say options sellers are at a disadvantage because of their asymmetric risk-reward. The Iron Condor featured in our beloved Cash Flow Condors video series is a prime example. We risk $9 for $1 of reward every single month. But mix in a high probability of profit (85%+) with good management and the perpetual overpricing of options and you can still have a recipe for profits.

It’s equally inaccurate to say options buyers or directional stock traders are at a disadvantage because of their low probability of profit. As far as options buyers go, the disadvantage comes in the form of their overpricing, not their lower probability of profit. Directional traders, especially stock traders, make up for the weak odds by playing setups where the risk is minimal, and the reward is substantial. For example, maybe you only have a 35% win rate but your average profit is $3 and the average loss is $1. You still come out ahead.

The differentiating factor between success and failure ultimately comes down to risk and trade management, regardless of your strategy or trading style of choice.

In closing, scurry on over to the post to catch the context of the discussion. Here’s the direct link.

—

If you’re a new trader, stick to your rules and try to process these concepts as you go. You don’t have to know everything to be able to follow your rules and make a trade. Generally, playbooks—like our own Trading Playbook (for PRO Members only) —are invaluable resources for new traders so that you don’t get your head spinning too much on the definitions.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.