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The Simpler The Options Strategy, The Harder To Win

Why is it so much harder to win using simpler options strategies versus more advanced options strategies?

More Advanced Strategies Doesn't Mean Better Results

I have covered in my previous article about why more advanced options strategies don't give you better results. However, options trading is a very fair game in that the lower the reward, the higher the chance of winning tends to be! Yes, even though more advanced options strategies do not necessarily produce the kind of potential profit that simpler options strategies produce, they generally give you a higher chance of winning and therefore even though simpler options strategies tend to give you better potential profit profiles, they are generally harder to win at too.

High Reward, Low Winning Chance

What Determines Chance of Winning?

So, what exactly determines the chances of winning of an options strategy? Very simply, all else equal, the options strategy that wins in more potential directions has a higher chance of winning. A simple example of this is, an options strategy that wins only when the stock goes up is going to be harder to win at than an options strategy that wins when the stock goes BOTH up or down. As such, in order to determine the chances of winning of an options strategy, it is first important to understand all the potential directions that a stock price can move in and then mapping out how many directions an options strategy can potentially profit from. In options trading, there are actually 6 possible directional outlooks or price behaviors that will determine the profitability of an options strategy!

Why Simpler Options Strategies Are Harder To Win?

Understanding the 6 possible price directions in options trading, it is now not a difficult thing to map out how many of those directions an options strategy can profit from. Lets map out the chances of winning of 3 options strategies from simplest to complex; A Long Call, A Straddle and Bull Ratio Spread. (Since volatile is an outlook and not a specific price direction, we will leave that out and map out the chances of winning based on a 5 directions market)

Long Call

Win: Big Up
Lose: Small Up, Sideways, Small Down, Big Down
Winning Chance: 20%

Long Straddle

Win: Big Up, Big Down
Lose: Small Up, Sideways, Small Down
Winning Chance: 40%

Bull Ratio Spread

Win: Small Up, Sideways, Small Down, Big Down
Lose: Big Up
Winning Chance: 80%

As you can see from the mapping above, you will see a rising in the chance of winning from the simplest options strategy to the more complex strategies. Of course there are more considerations than just these when it comes to choosing a specific options strategy but this mapping does allow us to have a rough insight as to why it is generally way harder to win using simpler options strategies and why some options traders employ more and more complex options strategies even though generally they will not be as profitable in a strong moving market.

Does That Mean Simpler Options Strategies Has No Value?

Not at all! In fact, far from that. Even though simpler options strategies generally profit in less directions, hence a lower chance of success, they usually come with better profitability potential and will therefore reward options traders who has the necessary skill and experience to be able to consistently trade in those few directions accurately! Yes, ultimately options trading rewards accuracy, the more accurate and precise your outlook, the better your profitability in options trading tends to become. As such, the more experienced an options trader becomes and the more accurate their technical analysis becomes, they start to go for simpler and simpler options strategies in order to reap the higher rewards.

In conclusion, options trading is fair. This is a concept that goes much deeper than its pricing mechanisms but indeed into every aspect of what options trading is and how options behave. The simpler an options strategy tends to be or the higher its potential reward, the harder it is also to win at generally. Options trading is fair.

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