Using Probability Calculators

One of the most important and basic items to have before option selling, is a probability calculator. In a hypothetical situation we will imagine that a person buys a $35 call option for $.50 and this has expiration in two months from now. Currently the stock is trading at $31. Therefore the call option is out of the money OTM by $4. Is there very big likelihood of succeeding if this person holds the option to expiration date? In this situation this person would have to look to see if he is able to at least break even on the trade. Obviously if the person is going after a profit (which is always the case), he will need to make sure the stock is higher than $35.50, and this would bring down your chances of making a profit even more. Let us say that you currently only have a 10.4 percent chance of breaking even. Is this good enough in your opinion? Would you really be ready to chance it and risk money on a trade that merely has a 10.4 percent possibility of succeeding? There are probably some that think that it is only fifty bucks that is wasted if it turns out expiring and therefore not worth anything. While this may be true, remember that if you believe that about one trade, you will most likely do the exact same thing the following times and will continue losing money. This can eventually tally up to being one hundred percent of investment loss. Let’s imagine that this person was not planning on hanging onto the trade to expiration date and planned to loosen the trade before time. if at this point the trader were to look in the calculator and sees that it says Touching Highest Target, for instance, he will be able to see that the possibility of the stock obtaining the breakeven of $35.50 will be a little bit under a fifty percent and this can be a pretty good outlook, however there are also occasions in which people choose to hold onto an option trade to expiration in hopes of obtaining a maximum gain. For some reason people are willing to hold onto it until the last moment hoping their investment will gain them a good profit. On the other side if we were to decide to take the low probability trades, what would occur? The chances that this person might have if they held their option to expiration would be around 89 percent, which is very good. However, it just turns out to be the other way around in the case of the buyer. And retuning to the possible outcomes for the option seller to gain, all that needs to happen is that the market does not go over $35.50 in this case. In this occasion you would find yourself on the winning side. One important thing to remember if you decide to be on the buying side, it is important to not hold onto an option to expiration. The best and most important thing you can learn is to sell the option.