Probability: Understanding the Difference Between Reality and Fantasy

In the image you can see how narrow the safe zone is on the Iron Condor.  Once we factor in this risk, the trade has a very low probability of profit.

SJ Options braves a new path when it comes to probability and analysis of stock option strategies. Since we truly believe you have to be “safe” at all times in order to have long-term success with stock option trading, we relate the Probability of our trades to the Safe Zone or the “Comfort Zone” of the trade.

To us the “Comfort Zone” is the realistic probability of the trade. Most option traders include the “Danger Zone” into their probability calculations, but we fully disagree with this methodology. If you are trading in a zone that is risking 40% to 100% of your portfolio, our belief is that eventually the harsh reality of that risk will unfold and you will lose most if not all of your trading capital.

We cannot stress this enough. We have had hundreds of calls over the years from retail traders who have lost most of their life savings trading option strategies that have these “high probabilities” of profit.

It’s time to understand the difference between reality and fantasy when it comes to analyzing your option strategies. If you continue to include the “Danger Zone” into your probability calculations, then one day, and it might be soon, you’ll be living the reality of that trade and it won’t be a good experience.