Some Investors Will Never Understand and That’s Okay

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I recently went back and forth with a gentleman who claimed that there are no statistical advantages in investing.

I asked him if he had ever used credit spreads or was familiar with the term probability of success. I wondered if he was familiar with the Black-Scholes model or binomial models in general. Did he have a sound grasp of mean-reversion or standard deviation.

No, he just wanted me to read a chapter from a book. As if in that one chapter, the author was able to defy mathematical science, more specifically probabilities.

Believe me, I get it. I understand that self-directed investors have been accustomed to listening to fundamentally and technically-based information. I understand that the curve-fitting is what gives a false edge to what is otherwise a statistically-inept way to invest. I get it.

But that doesn’t mean that I have to agree with it. No one wants to hear that what they have been doing for years was all for naught. Again, I get it.

The gentleman then proceeded with the typical machismo..he has two decades in statistics, and that he has a viewpoint that “lots of education and experience behind it.” Unfortunately, to me those are just words. It doesn’t matter to me what you know. I’m not trying to test anyone’s knowledge. I am sure the gentleman is intelligent and well-read.

Unfortunately, he doesn’t fully understand statistics or probabilities when it comes to investing, more specifically when trading options. I discuss this all the time with my better half who has a degree in Chemical Engineering from McGill, a masters in Bio-statistics from Columbia and more recent a Ph.D from none other than Harvard. I say this not as bravado, but to prove a point. I try to speak and more importantly teach others how to use probabilities using sound options strategies…aka. credit spreads. And I try to covey my message based on fact, not emotion. Having a statistical genius, who knows absolutely nothing about investing, allows me to discuss statistics in a way that has no bias. She doesn’t care what anyone thinks, she only cares about the probabilities…the statistics. Ditto.

In the end the gentleman kept touting his so-called knowledge, yet he has never sold one contract of an out-of-the-money credit spread. In fact, he had never traded options.

All of this is okay. It’s not my job to try and convert every investor to my way of thinking. That’s not why I am do this for a living. I just want to teach investors how to trade using probabilities. And I want to teach investors the best probability-based strategies out there. Verticals, condors, strangles, naked puts and calls. Not all of these strategies are okay with all investors as elements of risk-management must be understood…but again, that is why you are here…to learn the ins-and-outs of high-probability options strategies.

It is my hope that all of you can take something valuable from my discussions. It would be great if you could address any questions that you might have in the comments section of each post. That way, we could all learn from each other in a dynamic manner.

One more thing, I just wanted to thank all of you for the continued support, the response has been overwhelming recently. After years of talking about high-probability strategies, I can finally see a light at the end of the tunnel. Investors are starting to understand the power of probabilities. I am just thankful and proud that I am a part of it.

Market Comments

All of the major indices continue to struggle with any directional bias. Wednesday marked the fifth day of basically sideways trading. It is my opinion, that based on the sharp advance during the last part of November that we are going to see a short-term reprieve. So far, that has been the case which has been great for those of us who have credit spreads on for the December options expiration cycle. I am still leaning towards the bearish camp over the short-term, especially in the higher-beta Russell 2000 (IWM). As I have stated over the past few days, now is a great time to add a few credit spreads to the mix.

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