Trading Options In The Comfort Zone
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Option trading has another risk aspect attached to it. Today's article will explore that in detail. While trading options, many individuals evaluate the mathematical probability of a particular trade. From my experience as an option trader, I take the "Comfort Zone" into consideration. Let us understand the benefits of the Comfort Zone.
The Comfort Zone has two advantages to it. First, the Comfort Zone lets me relax as my trade option position is secure. Secondly, the option lets me make money. This video explains the traditional Iron Condor. When we look at it, one thing is clear. The probability of trade staying in the Comfort Zone is very less, which is 36%. However, the probability of the trade leaving the Comfort Zone is 83%. This implies that this trade is very risky as the trade has a higher probability in the "Danger Zone" than in the Comfort Zone.
If you look at Calendars Spreads and ATM Butterflies, you'll see that they also have a similar Comfort Zone as the Iron Condor. These trades are very difficult to manage in a volatile market. In addition to having such as small Comfort Zone, there's another factor that makes this trade even more difficult. The stock market doesn't trend sideways very often. If you look at the price chart in the video, you will see that the market only trended sideways 3 or 4 times over the last year.
Comparatively, the price chart shows that the stock market moved up and down 12 times over the last year. This is an indication that a vertical movement of the stock market is more predictable and consistent than a horizontal move. It is evident from this analysis that more bullish and bearish trades were prevalent than neutral trades in the last 12 months. Hence, the probability of the Comfort Zone can be increased to approximately 85% by constructing bearish and bullish trades. This allows us to enjoy a higher Comfort Zone with more trade opportunities that increases our returns and quality of life.
To conclude, the Comfort Zone can be defined as the '"Realistic Probability" of a given trade option because we really should consider 'Risk' when we analyze our trades.
Article Source: Articlelogy.com
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