{"id":30903,"date":"2013-08-28T13:10:46","date_gmt":"2013-08-28T17:10:46","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=30903"},"modified":"2023-06-08T10:24:56","modified_gmt":"2023-06-08T14:24:56","slug":"how-to-benefit-by-understanding-options-trade-probabilities","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities","title":{"rendered":"Maximizing Profits: Unlocking the Benefits of Understanding Options Trade Probabilities"},"content":{"rendered":"

Many who are new to options trading get excited when they hear about options trades that are \u201chigh probability\u201d! What they think is that these option trades usually win and earn money. Thus a \u201clow probability\u201d trade must mean the chances of winning are lower. But is it really that simple? And why would anyone enter a low-probability trade if there is a high-probability trade available?<\/p>\n

The answers to these options trading questions must be understood before you initiate your next options trade. In a previous trader education article, we discussed what options probabilities are based on, namely, if you do absolutely nothing and hold the trade until expiration the probabilities should work themselves out. So is a high-probability options trade automatically deemed to be considered a good trade if we decide to do nothing? Let\u2019s take a look at an example.<\/p>\n

If we put on a typical iron condor trade, which is the combination of a short (bullish) put spread and a short (bearish) call spread at a short strike of 10 delta, we can first focus on the credit that we would receive. For example, if we look at the Russell 2000 as of June 24, 2013, an August iron condor would bring in a $1.65 credit with 10 point wide spreads. So is this a \u201cgood deal\u201d?<\/p>\n

Well, if each month we\u2019d received the same credit<\/a> and we win eight times out of ten (as the probabilities of this particular trade would suggest we will statistically) we would win 8 x $165 = $1320. So what about the two losses that are we statistically likely to suffer?<\/p>\n

We are risking $1000 – $165 = $835. If we lose the entire amount two out of ten times, our losses would equal ($1,670) and thus this \u201chigh-probability trade\u201d would actually create a loss over a statistically significant period of time!<\/p>\n

So if a high-probability options trade could lose money if not managed, what does that say about a \u201clow probability iron condor\u201d? The bottom line is, you have to look at this from a different perspective. If we compare the two strategies the primary differences are the placement of the short strikes and the credit received.<\/p>\n

For the low-probability condor, you are going to receive a lot more credit for the trade because the short strikes are much closer to at-the-money. This gives you more money to adjust your trade, whereas a high-probability condor in many instances requires additional capital to adjust the trade.<\/p>\n

And speaking of adjusting, when you trade options, we rarely, just place a trade and walk away, holding until expiration. We almost always have a plan to either adjust or exit before we get hurt. This plan changes the meaning of the trade\u2019s probabilities substantially.<\/p>\n

One meaningful way of looking at the term \u201chigh probability\u201d is to think of it from an adjustment perspective. Thus a high-probability trade has a higher probability that it won\u2019t need adjusting vs. a low-probability trade. That is really the major difference.<\/p>\n

As stated earlier, we have rules and plans on how to manage these trades and because of this you must not<\/em> assume that a low-probability condor has a lower chance of making you money. As a matter of fact, many traders who start with trading high-probability condors end up preferring to trade low-probability condors because of the adjustment flexibility that they afford, due to the higher initial credit.<\/p>\n

So don\u2019t be fooled by the term \u201chigh probability\u201d as chances are it is not reflecting the chance of you being profitable over time in contrast with a \u201clow-probability\u201d trade. It\u2019s all about your adjustment plan and risk management.<\/p>\n

Seth Freudberg and Michael Schwartz<\/p>\n

no relevant positions<\/p>\n

 <\/p>\n

Risk Disclaimer<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"

Many who are new to options trading get excited when they hear about options trades that are \u201chigh probability\u201d! What they think is that these option trades usually win and earn money. Thus a \u201clow probability\u201d trade must mean the chances of winning are lower. But is it really that simple? And why would anyone enter a low-probability trade if … Read More<\/a><\/p>\n","protected":false},"author":1037,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[3327,1951,3325,1259,1965,3328],"class_list":["post-30903","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","tag-call-option","tag-option-strategies","tag-option-trading-strategies","tag-options-trading","tag-options-trading-strategies","tag-put-option","no-post-thumbnail"],"yoast_head":"\nBenefit by Understanding Options Trade Probabilities | SMB Training<\/title>\n<meta name=\"description\" content=\"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Benefit by Understanding Options Trade Probabilities | SMB Training\" \/>\n<meta property=\"og:description\" content=\"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\" \/>\n<meta property=\"og:site_name\" content=\"SMB Training Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/smbcap\/\" \/>\n<meta property=\"article:published_time\" content=\"2013-08-28T17:10:46+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-06-08T14:24:56+00:00\" \/>\n<meta name=\"author\" content=\"BarryL\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@smbcapital\" \/>\n<meta name=\"twitter:site\" content=\"@smbcapital\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"BarryL\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\"},\"author\":{\"name\":\"BarryL\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#\/schema\/person\/77a6f5a15b78b82ceee96ef2576000a7\"},\"headline\":\"Maximizing Profits: Unlocking the Benefits of Understanding Options Trade Probabilities\",\"datePublished\":\"2013-08-28T17:10:46+00:00\",\"dateModified\":\"2023-06-08T14:24:56+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\"},\"wordCount\":621,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#organization\"},\"keywords\":[\"call option\",\"option strategies\",\"option trading strategies\",\"options trading\",\"options trading strategies\",\"put option\"],\"articleSection\":[\"General Comments\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\",\"url\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\",\"name\":\"Benefit by Understanding Options Trade Probabilities | SMB Training\",\"isPartOf\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#website\"},\"datePublished\":\"2013-08-28T17:10:46+00:00\",\"dateModified\":\"2023-06-08T14:24:56+00:00\",\"description\":\"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.\",\"breadcrumb\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.smbtraining.com\/blog\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Maximizing Profits: Unlocking the Benefits of Understanding Options Trade Probabilities\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#website\",\"url\":\"https:\/\/www.smbtraining.com\/blog\/\",\"name\":\"SMB Training Blog\",\"description\":\"Lessons from the trading desk\",\"publisher\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#organization\"},\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.smbtraining.com\/blog\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Organization\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#organization\",\"name\":\"SMB Training\",\"url\":\"https:\/\/www.smbtraining.com\/blog\/\",\"logo\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#\/schema\/logo\/image\/\",\"url\":\"https:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2022\/07\/Logo-e1658419502954.png\",\"contentUrl\":\"https:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2022\/07\/Logo-e1658419502954.png\",\"width\":230,\"height\":81,\"caption\":\"SMB Training\"},\"image\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#\/schema\/logo\/image\/\"},\"sameAs\":[\"https:\/\/www.facebook.com\/smbcap\/\",\"https:\/\/x.com\/smbcapital\",\"https:\/\/www.youtube.com\/user\/smbcapital\"]},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#\/schema\/person\/77a6f5a15b78b82ceee96ef2576000a7\",\"name\":\"BarryL\",\"url\":\"https:\/\/www.smbtraining.com\/blog\/author\/barryl\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Benefit by Understanding Options Trade Probabilities | SMB Training","description":"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities","og_locale":"en_US","og_type":"article","og_title":"Benefit by Understanding Options Trade Probabilities | SMB Training","og_description":"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.","og_url":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities","og_site_name":"SMB Training Blog","article_publisher":"https:\/\/www.facebook.com\/smbcap\/","article_published_time":"2013-08-28T17:10:46+00:00","article_modified_time":"2023-06-08T14:24:56+00:00","author":"BarryL","twitter_card":"summary_large_image","twitter_creator":"@smbcapital","twitter_site":"@smbcapital","twitter_misc":{"Written by":"BarryL","Est. reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#article","isPartOf":{"@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities"},"author":{"name":"BarryL","@id":"https:\/\/www.smbtraining.com\/blog\/#\/schema\/person\/77a6f5a15b78b82ceee96ef2576000a7"},"headline":"Maximizing Profits: Unlocking the Benefits of Understanding Options Trade Probabilities","datePublished":"2013-08-28T17:10:46+00:00","dateModified":"2023-06-08T14:24:56+00:00","mainEntityOfPage":{"@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities"},"wordCount":621,"commentCount":0,"publisher":{"@id":"https:\/\/www.smbtraining.com\/blog\/#organization"},"keywords":["call option","option strategies","option trading strategies","options trading","options trading strategies","put option"],"articleSection":["General Comments"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#respond"]}]},{"@type":"WebPage","@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities","url":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities","name":"Benefit by Understanding Options Trade Probabilities | SMB Training","isPartOf":{"@id":"https:\/\/www.smbtraining.com\/blog\/#website"},"datePublished":"2013-08-28T17:10:46+00:00","dateModified":"2023-06-08T14:24:56+00:00","description":"Gain a deeper understanding of options trade probabilities and discover how to benefit from this knowledge to improve your trading.","breadcrumb":{"@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.smbtraining.com\/blog\/how-to-benefit-by-understanding-options-trade-probabilities#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.smbtraining.com\/blog"},{"@type":"ListItem","position":2,"name":"Maximizing Profits: Unlocking the Benefits of Understanding Options Trade Probabilities"}]},{"@type":"WebSite","@id":"https:\/\/www.smbtraining.com\/blog\/#website","url":"https:\/\/www.smbtraining.com\/blog\/","name":"SMB Training Blog","description":"Lessons from the trading desk","publisher":{"@id":"https:\/\/www.smbtraining.com\/blog\/#organization"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.smbtraining.com\/blog\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Organization","@id":"https:\/\/www.smbtraining.com\/blog\/#organization","name":"SMB Training","url":"https:\/\/www.smbtraining.com\/blog\/","logo":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.smbtraining.com\/blog\/#\/schema\/logo\/image\/","url":"https:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2022\/07\/Logo-e1658419502954.png","contentUrl":"https:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2022\/07\/Logo-e1658419502954.png","width":230,"height":81,"caption":"SMB Training"},"image":{"@id":"https:\/\/www.smbtraining.com\/blog\/#\/schema\/logo\/image\/"},"sameAs":["https:\/\/www.facebook.com\/smbcap\/","https:\/\/x.com\/smbcapital","https:\/\/www.youtube.com\/user\/smbcapital"]},{"@type":"Person","@id":"https:\/\/www.smbtraining.com\/blog\/#\/schema\/person\/77a6f5a15b78b82ceee96ef2576000a7","name":"BarryL","url":"https:\/\/www.smbtraining.com\/blog\/author\/barryl"}]}},"_links":{"self":[{"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/posts\/30903","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/users\/1037"}],"replies":[{"embeddable":true,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/comments?post=30903"}],"version-history":[{"count":5,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/posts\/30903\/revisions"}],"predecessor-version":[{"id":55541,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/posts\/30903\/revisions\/55541"}],"wp:attachment":[{"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/media?parent=30903"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/categories?post=30903"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.smbtraining.com\/blog\/wp-json\/wp\/v2\/tags?post=30903"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}