Option Trading In The Comfort Zone
In today's article we'll be exploring another dimension to risk while trading options
. Most people only consider the mathematical probability of a trade, but as an option trader myself I always consider the "Comfort Zone." You may ask what is this so called Comfort Zone?
The Comfort Zone is a place where I can relax knowing that my option position is perfectly safe. Not only is my position not at risk, but I can also make money in the Comfort Zone. In this video we are looking at traditional Iron Condor. We notice that when we consider the Comfort Zone, the probability of the trade is only about 36%. This is a very low probability. If we consider the probability on the trade ignoring the Comfort Zone then it's actually about 83%. This means that the majority of the probability on this trade is actually in the "Danger Zone". To me, this is a very risky and stressful trade to be in.
From observing the Calendar Spreads and ATM Butterflies, one can easily state that the Comfort Zone they hold is similar to that of the Iron Condor. An unstable market can make these trades very difficult to manage. It is not only because these trades have a very small Comfort Zone but it is also because of the fact that the stock market does not move sideways too often. In this video, if you see the price chart, you will notice that the marked moved sideways only 3 to 4 times during the last 12 months.
On the contrary, over the last year, the stock market moved up and down from 10 to 12 times. This trend enables us to predict a vertical movement more confidently and consistently. Having analyzed this, we infer that more bullish and bearish trades were prevalent in the last 12 months compared to neutral trades. So, we can expand our Comfort Zone probability to approximately 85% by constructing bullish and bearish trades. In addition to giving us increased opportunities for trade in one year, this gives a broader Comfort Zone that increases our returns and decreases our stress.
In short, the Comfort Zone is the "Realistic Probability" of a given option trade. The probability that is shown in the software includes way too much risk to find long-term success on these strategies.
by: Johnny M Junior
Washing Your Automobile Like A Professional Auto Retailer Why Bisociation is Important for Trading Systems and Trading Models - Emini The hot Trading Systems Trap Begin oscillator trading from RSI Swing Trading: Essential Rules and Ideas I-flow Corporation (iflo) - Financial And Strategic Analysis Review Integramed America, Inc. (inmd) - Financial And Strategic Analysis Review International Brachytherapy S.a. (ibt) - Financial And Strategic Analysis Review Marking Out Your Path To Success: Making Your Trading Plan Work How Can Retailers Prepare For Holiday Success Doji Candlestick Trading Secrets Wholesaler The bond within the producer plus the buyer Day Trading: High Probability Versus Low Probability Trading