When trading options, it can be helpful to assess the probabilities before making a decision to enter a trade.
Setting your options strategy is all about the numbers. And more. Brent Moors, Education Coach at TD Ameritrade, takes it to the next level in his weekly webcast, “Probability-Based Options Strategies.”
Q: That’s quite a lofty webcast title. Is it geared toward the advanced option trader?
A: Yes and no. I do believe it’s a topic that attracts the advanced set, because we sometimes get in pretty deep with the options greeks and other measures that could be a bit intimidating to newbie option traders. Basically, we show ways that option traders can assess probabilities when considering a trade or strategy. And this is something that should be useful to most option traders.
So, in our classes, we’ll often discuss simple options trades, such as a covered call or a cash-secured put. But we’ll also discuss layering in additional legs to the trade, and that can get more complex. Regardless of your experience, though, options trading shouldn’t be left to chance. There are a lot of uncertainties in the market and knowing the statistical probabilities—the odds that a trade will work out or not—can help.
Q: Can you give us an example?
A: To help illustrate these concepts during classes, we’ll try to find realistic trading opportunities given a certain event, such as earnings, or maybe another assumption, such as a trending stock that might continue.
When it comes to earnings, we might consider a calendar spread and investigate the potential effects that changes in implied volatility might have on the trade. In the case of a trending stock, we might consider a vertical spread. We look at scenarios that could result in a max gain, max loss, or breakeven for the example trade.
And then we might get into a discussion about trade-management decisions that every option trader needs to make, like when to take your profits and when to cut your losses. We use a full range of thinkorswim® tools—from a simple look at the options deltas and thetas, to a deep dive into the Risk Profile tab. So, again, these topics can be useful for novice and advanced option traders alike.
Traders can’t control what the option does after the trade’s been placed. But they can make an informed decision about whether it’s a good trade to enter in the first place.
Probability analysis results available in the thinkorswim platform are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
Explore upcoming TD Ameritrade webcasts.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2024 Charles Schwab & Co. Inc. All rights reserved.