Ask the Coach: What Are the Odds?

When trading options, it can be helpful to assess the probabilities before making a decision to enter a trade.

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5 min read
Photo by Dan Saelinger

Key Takeaways

  • Understand the importance of assessing probabilities when considering an options trade or strategy
  • In an uncertain environment it’s important to focus on trade management to help determine when to take your profits and cut your losses
  • Analyzing probabilities can help you determine if a trade is worth getting into in the first place

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.

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Key Takeaways

  • Understand the importance of assessing probabilities when considering an options trade or strategy
  • In an uncertain environment it’s important to focus on trade management to help determine when to take your profits and cut your losses
  • Analyzing probabilities can help you determine if a trade is worth getting into in the first place

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