I, along with many of you, am in the business of selling out-of-the-money credit spreads with a high-probability of success.
Essentially, I sell junk to speculators. Take the following iron condor in Apple.
An iron condor strategy is a non-directional options strategy that profits when the option on the underlying stock or ETF of your choice expires within your chosen range at expiration.
The basic premise of the strategy is easier to understand in the chart below. But the key part, and the real advantage of this trade…
You choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.
Recently, due to the increase in implied volatility in Apple, I have been able to sell credit spreads like verticals and iron condors for higher prices. But the increase not only allows you, the seller of options, to bring in more premium/income, it also allows you the ability to widen your range, thereby increasing your probability of success.
Just look at the range in the iron condor above….135 points. That’s right as long as Apple stays within our 135 point range we will make 17.6% in less than 40 days. I challenge anyone to find a trade/investment that consistently makes that much over such a short period of time. More importantly, I challenge someone to find a trade like this with such a high-probability of success…86% to be exact. When you compare that with the probability of your typical stock trade (50%) you begin to see the power of credit spreads.
Back to Selling Junk
As I said in the beginning, I sell junk to speculators. What do I mean when I say “sell junk”?
Let’s go back to the Apple trade.
If you look at the probability or (Prob. OTM) of the Nov 13 550 Calls and the Nov13 415 Puts you will see that the probability of success is 86.64% and 92.41%.
What that means is that there is a speculator taking the other side of the trade buying the Nov13 550 calls and Nov13 415 puts with a 13.36% and 7.59% probability of success otherwise known by professional options traders as “JUNK”.
Now you should have a good idea why professional options traders prefer selling options with a high-probability of success. Don’t believe the hype you hear from the financial media. Believe the numbers, the statistics, the probabilities…let common sense lead the way.
The house always wins…just ask the casino owners in Vegas.
If you are a believer in a statistical approach towards investing please do not hesitate to try my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it’s free for 30 days.