POP (Probability of Profit) Trading Methodology With Popular Strategies
Condors, Strangles, Credit Spreads, Calendars, Butterflies, Diagonals, Covered Calls, Ratios, Naked Calls and Puts, Etc.
Trading on POP (probability of profit), although very popular, is not the most effective way to trade. In fact, statistics indicate it’s the number 1 reason that most options traders lose money year after year.
The majority of options traders combine high-risk to small-reward trading strategies with POP, and think they will have a profitable outcome. Some trade small to reduce risk, but that approach is not usually effective long-term since it means returns on the entire account will be very low. Also, it’s not realistic. In general, traders are not going to leave 80 – 90% of their capital free in their account. Sooner or later traders will abandon the “trade small” concept, and they will leverage their money on these exposed strategies, and then the worst happens to them.
The foundation of POP trading relies on many criteria or it will not work:
- It assumes the underlying will never experience a flash crash.
- It assumes the underlying will stay within a very narrow range for long periods of time.
- It assumes the trader will not exit the trade even when they are way in the hole and risking 100% of the trade’s margin.
- It assumes a trader will not use much of their capital.
- It assumes a trader will be able to locate 10 products that they will never correlate.
- It assumes the multiple trades will not correlate during a market crash.
- It assumes the trader will be able to manage 10 trades at once during a market crises.
- It assumes that trading high POP is a positive sum game mathematically, but it’s actually a negative sum game when you factor in all the money market makers take out of the market.
- It assumes the trader has a deep pocket to roll when they need to, but this is contradictory since the trader is supposed to trade small at all times.
- It assumes volatility will never rise quickly.
Although trading small will allow a trader to prolong their trading activity, it does not remove the risk of these methods or change the risk to reward ratio. Still, one large loss can wipe out 10 gains, especially in a portfolio margin account.
Traders who use these methods ignore volatility risk. If they understood it, they would not trade most of these methods. Some even layer put ratios and strangles – a recipe for an account blow up. That just shows how little they really know about risk exposure and margins.
Traders who claim to have made 40% in one year are violating the “trade small” concept. The only way to make that much is to highly leverage an account. They omit this from their claims.
These methods are extremely dangerous when applied to a portfolio margin account. Ignorant traders believe margins can increase only 30%, but the truth is they can double easily, and while margins double, the account can be halved, which triggers margin calls and liquidations.
POP trading is the most common form of options trading. Statistics show that options traders lose 4.5% on average per month, and most of these losses are due to this form of trading.
SJ Options Method™
SJ Options Method™ is a different approach. We don’t believe in taking high-risk trades with less capital. Just because you scale a bad trade down, does not make it a good trade. That is not logical. We believe in trade safety and trade sizing. These are both key ingredients to trading. The SJ Options Method does not rely on POP calculations, but ironically, it has achieved a 99% winning rate.
Trading by POP is not realistic. There is too much risk inside the POP zone. The POP method is flawed in so many ways, but it takes the average trader many years of trading to understand it.