What are some low risk to reward ratio strategies?

[Pkay]

No. I buy calls and puts only and trade directionally. Do not sell any options. Too much trouble for the little you make. Just my 2 cents.

That's interesting to know. Most of the podcasts and blogs I've been reading or listening to say that buying puts and calls loses money in the long run.

My preference is to buy options too. When you say you trade directionally is this trading the trend? What do you use to determine direction and do you only buy options that are ITM? Thanks.

 

[smallfil]

Of course, you trade the direction of the trend. That is all that matters. ITM options are better because the stock has to move only a small amount for you to start making monies. As for selling options, I will pass on that and I do not care if it being promoted by other traders and even firms. Remember Optionsellers.com? They controlled hundreds of millions and sold options but, they did not hedge their large position. One big move against option sellers and you can get wiped out! I lost thousands and I was trading options spreads where I had protection! Can you imagine if you were selling naked calls? Risk to the upside is unlimited! If the stock gaps up, 20-30 dollars, you have suffered very large losses!

 

[SteveH]

long ago I found the best risk versus reward strategy is.....sit down with a glass of beer

cheers

I must point out you did not ask for the best risk reward trading strategies

Best reward to risk ratios (which are emotionally comfortable to trade) are found with LOWER avg winning pct systems (40%-60% range). You can't have long-term HIGH reward, LOW risk and HIGH winning pct.

Now, you CAN have high reward / low risk when you are trading within trends. The overall winning pct gets kicked down due to trading context errors. That is, from all the trades you took which you thought were in an ongoing trend but the market wasn't actually trending (so you get stopped out of those trades).

Padu, you're fixable in your real-time trading problems. But as Handle123 has already pointed out: you're stubborn. And who around here who is successful in trading really wants to continually try to help a stubborn know-it-all. A man in your position after 25 years should be as humble as the dust, but in your case, your ego is going to die two weeks after your body.

 

[qlai]

A man in your position after 25 years should be as humble as the dust, but in your case, your ego is going to die two weeks after your body.

Lol ... beautifully put.

 

[Pkay]

Of course, you trade the direction of the trend. That is all that matters. ITM options are better because the stock has to move only a small amount for you to start making monies. As for selling options, I will pass on that and I do not care if it being promoted by other traders and even firms. Remember Optionsellers.com? They controlled hundreds of millions and sold options but, they did not hedge their large position. One big move against option sellers and you can get wiped out! I lost thousands and I was trading options spreads where I had protection! Can you imagine if you were selling naked calls? Risk to the upside is unlimited! If the stock gaps up, 20-30 dollars, you have suffered very large losses!

Thanks, this is my fear as well. At least with buying options your risk is defined. Do you mind sharing a little on how you determine which direction a stock is trending on? Is it via moving averages or do you use other indicators? Thanks.

 

[smallfil]

You can plot a 50 EMA and clearly see if a stock is trending up or down. Just follow the trend. If the stock price is above the 50 EMA, you want to be long. If price is below the 50 EMA, you want to be short. Just by eyeballing a stockchart even without the moving average, you can see clearly if the stock is trending up or trending down.

 

[Pkay]

You can plot a 50 EMA and clearly see if a stock is trending up or down. Just follow the trend. If the stock price is above the 50 EMA, you want to be long. If price is below the 50 EMA, you want to be short. Just by eyeballing a stockchart even without the moving average, you can see clearly if the stock is trending up or trending down.

Thanks, once you establish the trend do you then buy an ITM option in the direction of the trend? Also, do you consider delta as well? Thanks.

 

[ironchef]

Padu, you're fixable in your real-time trading problems. But as Handle123 has already pointed out: you're stubborn. And who around here who is successful in trading really wants to continually try to help a stubborn know-it-all. A man in your position after 25 years should be as humble as the dust, but in your case, your ego is going to die two weeks after your body.

I like your comments.

Your comments for @padutrader though: You should realize by now, he is not coming here to ask for advice or help. He is sharing his experience and giving out advice himself.

 

[smallfil]

Thanks, once you establish the trend do you then buy an ITM option in the direction of the trend? Also, do you consider delta as well? Thanks.

I do not pay attention to delta because I am buying deep in the month options where practical.
That already put the odds in your favor. As long as your trade is aligned with the major trend, you should be good to go. Nothing is guaranteed but, the odds are in your favor and you should win a good number of your trades. My win rate is 40% buying calls and puts.

 

[daytonabeach83]

I've been selling spreads, naked puts and iron condors for a steady stream of income. I was enjoying it until some of them blew past through the strikes and wiped off all my gains (Disney last week, LULU last month and QCOM yesterday).

All of these short options were 82-85% probability OTM still. Not sure how can I play any safer?

I'm fine taking small losses but these kind of aforementioned losses just wipe out my weeks of earnings via premiums and hard work.

Any suggestions are appreciated.

risk-reward-PROBABILITY...

the amount you're risking and the amount you stand to gain are irrelevant without being factored against the probability of success to calculate your expected returns...a spread could have a 90% chance of success, but if you're having to put up $95 to make $100, it's still a high-risk and long-term losing trade... the percentage of the spread's width you pay to enter the trade should be LESS THAN the probability of profit...

also, pretty much everything retail investors touch that isn't an index has been getting abysmally hammered into the ground the past two months or so... thus, i wouldn't call this so much an issue of 85% probability spreads not holding up, but more so, the entire tech and growth sectors of the stock market have tanked recently...

also, if you're running spreads with an 85% probability of success, you are probably going to run into lots of issues where you make a ton of small gains that get wiped out and then some in one bad streak... a higher probability trade means you have to pay more for the trade... when things are going your way, you're making smaller profits, and when things go against you, as you're seeing now, the probabilities don't really matter so much... you can be a 90% probability spread and still get blown out...

the counterintuitive truth you can garner from this is that playing too conservatively is often times the riskier play, because your wins will always be smaller and your losses will always be bigger... it has a lot do with markets' inability to correctly price tail risk - i.e., the risk you're taking and the amount you're being paid to take it are fairly accurate when you're operating within 1 standard deviation, but once you get to outlier moves - and an 85% probability spread is right at the cusp of an outlier move - you aren't getting paid enough to take on the risk because the markets don't accurately price in tail risk...

trading closer to ATM, you'll have lower probabilities of success, but your wins will be much larger and your losses much smaller, and the probabilities will play out the way you're expecting more often... and because each trade costs less, you'll be able to put on more trades, which will increase your number of occurrences, and that's a good thing if you're trading probabilities...