Trading of options has another risk attached to it which most do not see. This article will be discussing it. When it comes to option trades, many of us calculate the mathematical probability only. However, being an option trader has made me think of the 'Comfort Zone' in a trade. So, what is the Comfort Zone?
The Comfort Zone lets me relax because I am confident that the position of my options is not only safe but remunerative. It is place where I am secure because there is minimal risk. This video will help us understand the traditional Iron Condor. It must be observed that the probability of the trade is only 36% in the Comfort Zone. This is indeed low. When we analyze the probability of the trade going away from the Comfort Zone, it is 83%. This is a clear indication that this trade is very risky as it has a high probability in the 'Danger Zone' and not in the 'Comfort Zone'.
From observing the Calendar Spreads and ATM Butterflies, one can easily state that the Comfort Zone they hold is similar to that of the Iron Condor. An unstable market can make these trades very difficult to manage. It is not only because these trades have a very small Comfort Zone but it is also because of the fact that the stock market does not move sideways too often. In this video, if you see the price chart, you will notice that the marked moved sideways only 3 to 4 times during the last 12 months.
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.
In short, the Comfort Zone is the "Realistic Probability" of a given option trade. The probability that is shown in the software includes way too much risk to find long-term success on these strategies.
The Comfort Zone lets me relax because I am confident that the position of my options is not only safe but remunerative. It is place where I am secure because there is minimal risk. This video will help us understand the traditional Iron Condor. It must be observed that the probability of the trade is only 36% in the Comfort Zone. This is indeed low. When we analyze the probability of the trade going away from the Comfort Zone, it is 83%. This is a clear indication that this trade is very risky as it has a high probability in the 'Danger Zone' and not in the 'Comfort Zone'.
From observing the Calendar Spreads and ATM Butterflies, one can easily state that the Comfort Zone they hold is similar to that of the Iron Condor. An unstable market can make these trades very difficult to manage. It is not only because these trades have a very small Comfort Zone but it is also because of the fact that the stock market does not move sideways too often. In this video, if you see the price chart, you will notice that the marked moved sideways only 3 to 4 times during the last 12 months.
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.
In short, the Comfort Zone is the "Realistic Probability" of a given option trade. The probability that is shown in the software includes way too much risk to find long-term success on these strategies.
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