Seems like the stock market has become a giant casino.
And I’m here for it.
However, there’s a difference between taking wild bets and how the pros gamble.
And today I’m going to show you how to gamble like a pro.
I paid $30 on a trade that has a 16% chance of working.
Most people who are taking shots with options have no clue what the odds are. I knew my odds here and I took them anywyas.
This morning I put on one butterfly in the SPX, 30 cents, and I’m working two more.
I like those kinds of trades and I’m not going to make an excuse for it. Some people don’t like that stuff, then don’t do it.
16% sounds terrible until you run the arithmetic on what it pays.
The trade is a 20 point wide butterfly at 7500 in the SPX, expiring Friday.
A butterfly is three strikes.
You buy one below, sell two in the middle, buy one above. It pays out biggest if price lands right on that middle strike, and because you’re paying for a narrow window instead of a direction, it costs almost nothing.
Thirty cents. And SPX options carry a 100 multiplier, so that’s thirty dollars of real money for the position.
Now, where does it have to go?
The SPX is trading around 7,671 this afternoon. My middle strike is 7,500. So I need about 171 points out of this thing, call it 2.2%, and I need it inside three sessions.
That’s why it’s 16%.
Now what happens if it hits.
Get there Wednesday or Thursday and that thirty cents turns into two bucks, which on a 100 multiplier is two hundred dollars. Hit it Friday and you could see five, six, maybe even $700, so $500 to $700 a contract.
The absolute ceiling on a 20 point fly is 20 bucks, which is $2,000 minus the cost of the trade.
I’m not counting on that and neither should you, because price would have to close right on the number.
But $30 at risk against $200 mid-week or $500 to $700 by Friday?
Run that against a 16% chance and tell me it’s a bad bet.
So why 7500 and not somewhere closer?
Today’s expected move in the SPX was $33.54. That’s what the options market thinks the index can do, and normally I’d take my shot at the lower edge of it. You’re welcome to do exactly that.
I went about 190 points below it instead, and that’s highly unusual for me.
The reason is that 7511 in the S&Ps is a level we’ve traded around for a considerable period, going back to early June.
Price has channeled back and forth off that number for months. I’ve got a good memory for dates and price action, and when I look at a chart and see a number like that, I can usually recall exactly how many days we spent in that realm.
That level holds a lot of weight, at least for me, and no expected move calculation can see it. The expected move is built from implied volatility this morning. It has no memory of June.
So I’m not aiming at what the formula says. I’m aiming at where the market keeps going back to.
A low probability trade is wrong most of the time on purpose, because the payout when it works is worth being wrong four or five times to get there.
So if you’re gonna gamble, have a strong reason why, and make sure the risk to reward is worth it.
Of course, I run other strategies that are high probability and that’s what I’m going to be talking about this Thursday at 12pm ET.
30% in 30 days or less…rinse and repeat.
And if that doesn’t tickle your fancy.
I’m giving one attendee $2,000 for just being there.
To your success,
Don Kaufman
