What are some low risk to reward ratio strategies?

daytonabeach83 said:
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...
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I’ve had one of the best runs in my career in the last 3 months (in dollar terms). I made more than what some people on here have described as quit and retire money. It was all on the single stock stuff that is abysmally hammering all the retail guys according to you.
 
newwurldmn said:
I’ve had one of the best runs in my career in the last 3 months (in dollar terms). I made more than what some people on here have described as quit and retire money. It was all on the single stock stuff that is abysmally hammering all the retail guys according to you.
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all the retail guys i know, of course.. obviously i don't know everyone who trades the stock market :confused:
 
newwurldmn said:
that’s not what your statement said. You qualified it as the retail community was hammered. Do you still stand by that claim?
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yes, 100%..

i said "pretty much" - meaning most of the ones i'm aware of, but NOT all - "everything retail investors touch" - meaning the stocks themselves, not the individual investors - has been getting abysmally hammered..

you could've made 100% ROC in the past month shorting SQ.. but guess what? my statement would still be correct lol cuz SQ is down substantially from her recent peak..

for someone attempting to debate semantics you seem a bit oblivious to the semantics you're actually trying to debate lol.. at least read what i said before making condescending responses based on what you imagined i said..
 
IMO this is the classic idiocy that is created by the retail options education industry.

You CANNOT calculate ITM probability by looking at options deltas. Options delta is IMPLIED by the options price aka implied volatility.

If the option you are writing is priced too low it's implied ITM probability is also priced too low and you gonna get your balls kicked if actual vol is higher than implied.

Don't use probabilities to select your strikes and term. Use iV vs stat vol and theta/gamma ratios
 
MrMuppet said:
IMO this is the classic idiocy that is created by the retail options education industry.

You CANNOT calculate ITM probability by looking at options deltas. Options delta is IMPLIED by the options price aka implied volatility.

If the option you are writing is priced too low it's implied ITM probability is also priced too low and you gonna get your balls kicked if actual vol is higher than implied.

Don't use probabilities to select your strikes and term. Use iV vs stat vol and theta/gamma ratios
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so, how do you view a situation where an ATM spread with equidistant strikes is marking at less than 50% of the spread width? isn't the ATM probability supposed to always be 50%, regardless of delta? even if you don't buy whatever delta the ATM call is giving (it might say 55, for instance), if ATM is 50%, and the spread costs less than that, are you saying there's still no positive expectancy?
 
daytonabeach83 said:
so, how do you view a situation where an ATM spread with equidistant strikes is marking at less than 50% of the spread width? isn't the ATM probability supposed to always be 50%, regardless of delta? even if you don't buy whatever delta the ATM call is giving (it might say 55, for instance), if ATM is 50%, and the spread costs less than that, are you saying there's still no positive expectancy?
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No, because you calculate Expected Value positive probability*positive outcome-negative probability*negative outcome.
How would you want to calculate your expectancy when the only thing you know is the premium received, but not the loss due to adverse moves in the underlying?

Either the option is sold for more than the delta hedge is gonna cost you or you lose
 
MrMuppet said:
No, because you calculate Expected Value positive probability*positive outcome-negative probability*negative outcome.
How would you want to calculate your expectancy when the only thing you know is the premium received, but not the loss due to adverse moves in the underlying?

Either the option is sold for more than the delta hedge is gonna cost you or you lose
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to circle back to something you said above, about selling options where vol is understated, i'm typically basing strike selection on the shape of the expiration's vol curve.. i try to buy the dips, and sell the peaks, so regardless of which direction the underlying moves the short is losing vol while the long is gaining it.. the goal is to have both delta and mean reversion of the vol curve to neutral as mechanisms for profit..

to answer your question, i would assume, all things being equal in an efficient market, that the expectancy would always be 0 barring some kind of imbalance in market dynamics.. current value = expected value, at least that's what the efficient market theory guys say..
 
daytonabeach83 said:
to circle back to something you said above, about selling options where vol is understated, i'm typically basing strike selection on the shape of the expiration's vol curve.. i try to buy the dips, and sell the peaks, so regardless of which direction the underlying moves the short is losing vol while the long is gaining it.. the goal is to have both delta and mean reversion of the vol curve to neutral as mechanisms for profit..

to answer your question, i would assume, all things being equal in an efficient market, that the expectancy would always be 0 barring some kind of imbalance in market dynamics.. current value = expected value, at least that's what the efficient market theory guys say..
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That's probably the best way to do it. You're a trader so you want to buy below fair value and sell above, not speculating about future outcomes.

Thing is, options - especially single names - are basically a dealer market more than any other asset class. And the dealers inventory is limited.
All you have to do is ask yourself how much pain these guys can stand during special situations.
Let's say you're a market maker in stock options, underlying trades about 200k shares at 20$ per day and some guy walks in and sweeps 5 OTM strikes in the 3m for 5000 calls total.
First you'd think, what an idiot and adjust your offers higher. He comes back, does the same thing for 5000 calls again. No news on the stock, btw.
You widen your spread again but this time you're not that comfortable anymore. You're short 10k OTM calls, your delta hedges already move the underlying and the other MMs adjusted their vols to the upside.

Then more call buyers, small lots across all terms and strikes. You're hitting your gamma and vega limits. You bid up to get rid of some exposure at a loss to be able to maintain a 2sided market.

Now that is what happens, day in and day out. When MMs are unlucky they get hit by one sided flow over and over and they will adjust quotes to absolutely insane levels that are everything else from efficiency. GME puts? :)

And that is where retail has edge, because you can watch from the sidelines and that's how you get into +EV situations.

The market is always wrong and it's up to you to capture the inefficiency
 
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