Trading of options has another risk attached to it which most do not see. This article will be discussing it. When it comes to option trades, many of us calculate the mathematical probability only. However, being an option trader has made me think of the 'Comfort Zone' in a trade. So, what is the Comfort Zone?
The Comfort Zone has two advantages to it. First, the Comfort Zone lets me relax as my trade option position is secure. Secondly, the option lets me make money. This video explains the traditional Iron Condor. When we look at it, one thing is clear. The probability of trade staying in the Comfort Zone is very less, which is 36%. However, the probability of the trade leaving the Comfort Zone is 83%. This implies that this trade is very risky as the trade has a higher probability in the "Danger Zone" than in the Comfort Zone.
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.
In contrast, the price chart indicates that the stock market went up and down 12 times over the last year. This shows us that we can forecast an up or down move easier and more consistently than a sideways move. Having this information we can conclude that over the recent period of 12 months we will could have found more bullish and bearish trades than we would have neutral trades. And the interesting thing is that with by constructing bearish and bullish trades, we can increase our Comfort Zone probability to about 85%. So not only do we have more trade opportunities within a one year period, but we also have a higher Comfort Zone which increases the quality of our life as well as our returns.
So, the Comfort Zone can be defined as the "Realistic Probability" of a given trade option. The probability of the Comfort Zone that is shown in the software is too less to achieve success on a long-term basis.
The Comfort Zone has two advantages to it. First, the Comfort Zone lets me relax as my trade option position is secure. Secondly, the option lets me make money. This video explains the traditional Iron Condor. When we look at it, one thing is clear. The probability of trade staying in the Comfort Zone is very less, which is 36%. However, the probability of the trade leaving the Comfort Zone is 83%. This implies that this trade is very risky as the trade has a higher probability in the "Danger Zone" than in the Comfort Zone.
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.
In contrast, the price chart indicates that the stock market went up and down 12 times over the last year. This shows us that we can forecast an up or down move easier and more consistently than a sideways move. Having this information we can conclude that over the recent period of 12 months we will could have found more bullish and bearish trades than we would have neutral trades. And the interesting thing is that with by constructing bearish and bullish trades, we can increase our Comfort Zone probability to about 85%. So not only do we have more trade opportunities within a one year period, but we also have a higher Comfort Zone which increases the quality of our life as well as our returns.
So, the Comfort Zone can be defined as the "Realistic Probability" of a given trade option. The probability of the Comfort Zone that is shown in the software is too less to achieve success on a long-term basis.
About the Author:
Trade safer! Trade Smarter with San Jose Options! Visit our Options Trading Course online today to learn about Trading Options in the Comfort Zone!
No comments:
Post a Comment