by Helmut Schmidhofer
What an oxymoron! Speculation is always associated with high risk, yet here I propose a strategy that is supposed to be free of risk?
I am not saying that the strategy doesn't ever lose. However, it wins more than it loses. Let me make a comparison:
Take the roulette wheel's 36 numbers, half are red and half are black, half are even and half are odd, half are 18 and under, half are 19 and over. If that were all, an unbiased wheel would give you an even chance. However, the house that runs the wheel takes no risk because there is also a green zero (European wheel) plus a green double-zero (American wheel).
The player has 18 chances of winning, the house has 19 or 20 chances of winning. Or, if the player successfully bets a single number, the win is 35 bets but the number of losses between wins is 36 or 37, clearly a negative outcome overall.
The aim of these notes is to explain a strategy similar to that adopted by gambling casinos.The casino doesn't mind paying out $35 whenever a player wins because, on average, it collects 36 or 37 times $1 for every one payout.
How would you feel if you won fifteen times $1 for every one payout of $9? Giving 9:1 odds when the true odds are 15:1 against? You would feel like a casino.
So far, we have discussed many tools that are used by speculators to predict market direction. All are useful, none are risk-free.
To bring the numbers in your favour, you must add another layer to your predictions. That layer is OPTIONS.
How you can tame options to give you more winners than losers is explained in these brief lessons.
In simple terms, if you sell (write) way-out-of-the-money options, either puts or calls or both, the probability of the options expiring worthless, letting you keep the premium, is far greater than the probability of having to make a payout.
Another simple proposition is to buy deep-in-the-money options, calls if bullish, puts if bearish, in lieu of buying or short selling the underlying security. In this case, options are safer and give you better gearing.
However, a solid understanding of the basics is essential before you can implement the strategies. Do not skip the next few notes, even if you have traded options before.
Back to volume action Proceed to option basics
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