This Apple Trade Has A 99.82% Chance Of Winning...
Can your trading strategy offer you a 99.82% probability if profit?
Mine can. Let me show you.
If you were to buy a stock, what kind of odds do you get?
You should know that it's no more than 50/50, right?
As soon as you buy the stock, it can either go up or down from your buy-in level. That's a 50% chance that you can win or lose on the next tick.
Even if you did all your due diligence and research on the stock and you think you got yourself a winner, there's still only a 50% chance it will go up from the moment you buy.
After that, it's anyone's guess which way the stock moves.
I like to pick trades that have a much higher probability of profit.
How do I do it?
You guessed it - by selling put options.
Sign up for Lee Lowell's free "Put-Selling Basics" e-book right here
The common theme in my blog posts, and the one I drive home more than anything else, is that selling options contracts (versus buying them), has a much higher chance of winning, especially if you sell out-of-the-money (OTM) options.
The Insurance Companies And Casinos Get It
Most of my trades come from the thought process of: I'm going to figure out where a stock isn't likely to go, instead of trying to figure out where it's likely will go.
Do you ever wonder why insurance companies and casinos make so much money?
Because they offer bets on things that aren't likely to occur. Right?
Insurance companies take in millions (if not billions) of insurance premiums per year and are able to keep that money because most likely your house isn't going to burn down or you're not going to get into a car accident or because you're not going to die before your life insurance runs out. All those unused premiums end up being pure profit.
Same with the casinos. They take in billions of dollars of bets each year by offering games that they know most people won't win. Sure, they'll have to pay out the occasional win, but it won't be enough to offset all the other bets they keep as profit.
It's the same with the stock market. If I have a decent idea of where a stock might go, then that means I should have an even better idea of where it won't go. Think about that.
If a stock is in an uptrend and has bullish momentum behind it, then I'm pretty sure it will keep going up. How far? Who knows. But I'm even more sure that it won't go down too much.
And my bets will be placed on the concept of the stock not going down, instead of it being placed on it continuing to go up. That's how the insurance companies and casinos would do it. They're betting on the least likely outcome.
To me, the least likely outcome is for the stock to not go down. And you can make bets that way in the stock market.
By selling put options.
A Juicy "Apple" Trade
Take a look at the current chart of Apple:
It closed yesterday (11/8/19) at $260.14 - an all-time new high.
Going forward, I'm pretty sure it will keep going up. But my odds won't be any better than 50/50 if I just bought the stock. It could crap out as soon as I buy it. Murphy's Law, right?
I can get a much higher probability of profit by making a trade based on where the stock won't go (down).
Here's what I'm doing - selling an Apple April 2020 $160 put option for $.57 per contract (not a recommendation).
In the option chain above, the AAPL April 2020 $160 put option is paying out $.57 per contract (splitting the bid/ask).
When I sell this put option, I will receive $57 upfront from the put option buyer.
Why would the put option buyer pay me this money? Because I'm taking on his bet in which he thinks that Apple will fall from its current price of $260 to $160 by April 2020.
Put option buyers are betting that the price of a stock will fall. In this case, that person believes Apple will fall $100 per share between now and April 2020.
I'm betting that it won't, and I'm collecting this person's bet (option premium/insurance premium) as my fee.
If Apple doesn't fall to $160 by April, I win. I get to keep the bet and the put option buyer loses.
If Apple falls to $160 by April, then I still win. Why? Because I get to buy 100 shares of Apple for $160 per share, which I'll gladly do. Wouldn't you? That's $100 lower than today's price, which represents a 38.4% discount.
See, when you sell a put option, you obligate yourself to buy the stock (Apple) at the strike price level ($160), but only if Apple falls to $160 by April 2020. In exchange for that obligation, I receive $57 for each option contract sold.
But I'm pretty sure that Apple won't fall that much by April, especially due to it being such a great company and the current uptrend that it's in.
And, I have the stats to back it up.
My Secret Weapon
You see, my special calculator is telling me the chances of Apple falling to $160 by April 17, 2020 is a measly .17% chance. Said another way, it has a 99.82% chance of staying above $160.
That gives me a 99.82% chance of winning. And by winning, I mean that I'll get to keep the put option buyer's bet of $57.
Just like the insurance companies and casinos, I'm betting on an occurrence that most likely won't happen - Apple falling to $160 by April 2020.
I do trades like this all year long, on many different stocks, collecting all kinds of upfront bets - most of which have over a 95% chance of winning.
It's a great slow & steady account builder (the money really adds up over time), and it beats the low odds bets of trying to figure out where the stock will go.
I like figuring it out where it won't go. Much easier.