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 with "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 recently 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 convey 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.

If you haven’t, join my Twitter feed or Facebook.

Also, I have officially opened up my strategies to the public.  If you are a believer in a statistical approach towards investing please do not hesitate to try one of my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it’s free for 30 days.

Kindest,

Andy

There is a reason why out-of-the-money options are so cheap; it’s the equivalent of buying a lottery ticket. And gamblers love lottery tickets.

But unlike the typical lottery system where the seller of the ticket pays only a small portion of the overall proceeds in the form of winnings, options are a zero-sum game in the truest sense of the definition – winner’s profits are loser’s losses. And the majority of loser’s losses typically come in the form of speculative out-of-the-money plays.

The winners know how to skew the results. Moreover, they know the risk-reward and the probability of success BEFORE each trade.

In the options world the gambler is defined by a trader who buys a call or put with a delta of .35 and below. (Delta is the probability that an option will expire in the money.)

Like lottery tickets in the store, options with deltas this low have a low probability of success. But because of their cheap price and high-profit potential, they lure in newbie options traders.

This is why I prefer to take the other side in this zero-sum game. I do so by essentially taking the other side of the trade – by selling options to the speculative crowd.

(more…)

(more…)

Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.

-David Sklansky, The Theory of Poker

As I always say, investment success comes from process.

Let me explain.

Back in my early 30s when I was privileged to live in sunny Flagstaff, AZ, I would take the reasonably short drive to Las Vegas so that I could make one the best bets in the gaming world.

For those not familiar with the game of craps, the free odds bet placed behind an opening pass line bet carries no house edge. The casino makes no profit on this bet. This is the only bet you can make on a table game where the odds aren’t against you.

How can the casino make this bet available when they don’t make any money on it? Simple: Most players aren’t smart enough to make this bet.

(more…)

Fifteen minutes before the close Wednesdayit looked like the bulls were about to claim victory for the third straight day. But, to the bulls' dismay, the bears made a last minute appearance. The push lower took the S&P 500 (SPY) from $144.90 down to $144.00, which is where it sits after the close.

The move doesn’t seem like much, but the S&P was higher almost 1.0% Wednesday, before eventually closing the day down roughly 0.75%. If the bears are serious a move below $142.50 would have to occur before they are taken seriously.

Even after the move lower Wednesday, there are still several key ETFs that are in a short-term overbought state. I am watching FAS closely and EWY, the South Korean ETF.  A push lower in FAS would certainly be a sign that the market in general is headed lower which would be wonderful for my SPY bear call spread. However, I am a but more interested in EWY.

(more…)