Risk/Reward and Probability of Winning

BMK

BMK

In a different thread IamTheCasino said:
you cant have good probability and a favorable risk reward. Thats called a perfect trade and it doesnt exist.
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Anyone care to agree or disagree with this? I think many of us spend most of our time looking for just this: trades with a high probability of success and also a good risk/reward ratio. But that doesn't mean we actually find them LOL

During the original circus that went on with GME, I swore I wasn't going to get involved. But when it started running up again last week, I couldn't resist dipping my toes.

On Thursday afternoon 02/25, I sold a few deep OTM call spreads expiring 02/26. They expired worthless and I made a little money.

The risk/reward ratio sucked.

I sold the 175/180 call spread for a credit of $1.00, and the 200/210 call spread for a credit of $1.41. I think the stock was trading at about $140.

I am not disclosing how many contracts, because it doesn't matter. The total risk was less than 1% of my capital.

BMK
 
Yes. It's a trade-off. That's also the reason why IMHO extremely high profit factors in backtests are suspicious. Profit factors well above 2 ... let's say 3, 4 or 5 are usually the result of excessive curve fitting. And that's absolutely logical. While there have to be some exploitable inefficiences in any market, it simply makes no sense that all other market participants are THAT stupid to leave so much money on the table.
 
One thing lost of most traders is when you enter a position based on your analysis of the stockcharts, no matter how nice the setups, there is no guarantee it is going to be a winning trade. Just this morning I got into a trade last week, that stock is looking at a huge gap down. That is a 50% loss easily. However, since, I risk only 2% per trade, even a 50% loss is just 1%. No biggie. Risk management goes above anything, before even getting into a trade. You do not know which trade is going to be a big winner or big loser for that matter. The expectation fluctuates too, so, your risk reward could be sky high at times, one time an account had a 15/1 average win to average loss ratio with 30% win rate. That is huge. I knew it was temporary. Now, it is 5/1 and win rate is around 33%. Still positive expectation so, not focused on that.
 
BMK said:
Anyone care to agree or disagree with this? I think many of us spend most of our time looking for just this: trades with a high probability of success and also a good risk/reward ratio. But that doesn't mean we actually find them LOL

During the original circus that went on with GME, I swore I wasn't going to get involved. But when it started running up again last week, I couldn't resist dipping my toes.

On Thursday afternoon 02/25, I sold a few deep OTM call spreads expiring 02/26. They expired worthless and I made a little money.
The risk/reward ratio sucked.

I sold the 175/180 call spread for a credit of $1.00, and the 200/210 call spread for a credit of $1.41. I think the stock was trading at about $140.

I am not disclosing how many contracts, because it doesn't matter. The total risk was less than 1% of my capital.

BMK
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%%;
I had all[100%] of the GME position i wanted also=0%.
I havent had time to even check out GME lately.
QQQ...... has had some good risk reward + profits + some can do better that that.........
PT Barnum did fine with a circus\selling anyway LOL
Actually i like animals + feed birds/buy birdseed. + grow birdseed...............................
 
MrMuppet said:
strongly disagree.

In fact high winning probability plus high payout basically defines edge
If you dabble with probabilities given by options delta then your calc is off.
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Maximizing payoff is the best strategy. Generally, high probabilities come with small rewards, and vice versa. However one calculates probability, whether in the link or by using option delta, payoff maximization is the key.
 
panzerman said:
Maximizing payoff is the best strategy. Generally, high probabilities come with small rewards, and vice versa. However one calculates probability, whether in the link or by using option delta, payoff maximization is the key.
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That's just not true. If your edge is in the delta, trade d1 products and stay away from options.

If you take actual options delta as a measure for probability your edge is actual probability (that YOU have to gauge) vs the probability the option is providing. If that is equal, you have no edge.

There are more than enough trades in my portfolio right now that are extremely high probability and offer decent reward. It's the job of the trader to find these.

If you just slap on a high probability/low reward structure and think you can "manage" the structure by trading delta...well, you should probably look for another hobby
 
MrMuppet said:
That's just not true. If your edge is in the delta, trade d1 products and stay away from options.

If you take actual options delta as a measure for probability your edge is actual probability (that YOU have to gauge) vs the probability the option is providing. If that is equal, you have no edge.

There are more than enough trades in my portfolio right now that are extremely high probability and offer decent reward. It's the job of the trader to find these.

If you just slap on a high probability/low reward structure and think you can "manage" the structure by trading delta...well, you should probably look for another hobby
More...

As a retail trader, selling premium has no "edge" whatever strategy you employ to pick strikes, and maximizing payoff is optimal. If you can handle the bleed, following a Taleb-like net long barbell strategy may have an inherent edge.
 
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