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Standard Deviation: Short Put 1 SD below Stock Price = 84% Probability of Closing OTM

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Day 1 of a 4 day explanation of Standard Deviation. Tom and Tony explain standard deviation and how it relates to volatility, expected move, and probability of success. If you sell a put 1 SD below the stock price, it has an 84% probability of finishing OTM. Watch to see why! ======== tastytrade.com ======== Finally a financial network for traders, built by traders. Hosted by Tom Sosnoff and Tony Battista tastytrade is a real financial network with 8 hours of live programming five days a week during market hours. Tune in and learn how to trade options successfully and make the most of your investments! http://goo.gl/EaF69C Subscribe to our YouTube channel: http://goo.gl/Szl24S Watch tastytrade LIVE daily Monday-Friday 7am-3pmCT: http://goo.gl/EaF69C Download our mobile app, Bob the Trader: http://goo.gl/zgIyco Follow tastytrade on Twitter: https://twitter.com/tastytrade Become a fan of tastytrade on Facebook: https://www.facebook.com/tastytrade Follow tastytrade on Pinterest: http://www.pinterest.com/tastytrade/
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Text Comments (51)
sudhir chettri (23 days ago)
provide excels
Steve Kranz (6 months ago)
Thanks for all the good material. One aspect that I think could have been emphasized more here is the reality that having 84% of our trades win might easily still leave you with an overall portfolio loss. As you know it is not as simple as just having a large sample set to insure an overall profit unless it's the case that you earn as much on the winners as you stand to loose on the duds. But of course we know that all it takes is 2 nasty losers to completely wipe out the gains of the 8 winning trades. Unlike a coin toss, the outcome is not symmetrical. Again, thanks for everything.
julie r (5 months ago)
That’s why it’s referred to as picking up nickels in front of a steamroller
chris johnston (6 months ago)
I like these guys, easy to understand and no hurry on explanations.  Thanks for making the videos!
PrestoWind (7 months ago)
This is a misleading video. Yes, if you sell a put 1 SD below the stock price, it has an 84% probability of finishing OTM, using hundreds or thousands of occurrences. 84% is a very inaccurate probability for shorter term trading. If you don't believe me, try it.
Anttjuan Reid (5 months ago)
julie r Refreshing to hear about technical analysis coupled with options trading. Seems like many option traders disregard a chart and rely solely on the probabilities of in or out of the money. I am completely neutral on this as I don't know enough yet but don't see many option traders consider technical analysis. Whether for good reason or not, I don't know yet but that's all I'm poining out.
julie r (5 months ago)
Obviously it’s not this simple or everybody would be doing it and getting rich (but of course if too many did it, it wouldn’t work because IV would shift). But, combine this with support and resistance, and short term trends, and it’s halfway decent over a few dozen trades. You will NOT win 84% of the time. That part is definitely misleading.
Anttjuan Reid (7 months ago)
PrestoWind Interesting.
Foto Guy (8 months ago)
This is Truly PROFOUND !!!!!! 06:51 I Love it Tom This is some of the Best Info....I have heard for free!!!!
Samir Naik (1 year ago)
"sell a put 1 SD bellow the stock price" for example Stock value 500 and each strike different is 20 (440-460-480-500-520-560) so what is means "sell a put 1 SD bellow the stock price" which strike 🤔. ex. SD= 1.96 and stock price 500 = 500-1.96%=490 so I can sell 480 strike am I right ? 🤔🤓🤔
RATI RANJAN Sahoo (2 years ago)
what is 1 standard deviation kindly tell me .I am not understand
the business handler (2 years ago)
I want to learn how to trade options
Market Index Builder (2 years ago)
I believe the correct statement should be: A stock will close within 1 SD up or down 68.2% of the time.
Corporate Algorithm (2 years ago)
Bam! Thanks!
John Doe (2 years ago)
Horrace Greenleaf and Mego....you are right on target with your comments. THE MATH IS FLAWED This strategy is pretty much a ghost chase unless you're trading on margin (day-trader status)....that said, it can work under certain conditions. 1) you need to have a sizeable bankroll because 2) that is what's required to sell options with enough premium worth collecting at 2 Standard Deviations (YES, I SAID 2-SD...believe me you will get killed if you try to apply a random-walk approach by selling at 1-SD). COLLECTING 1/3 THE WIDTH OF YOUR STRIKES AT 1-SD... THERE'S NO SUCH ANIMAL IN THE ZOO! The problem here is that, unless market volatility is rediculously high, you will NEVER find a trade where the strategy on this video works. They're telling you to collect 1/3 the width of your strikes on a Vertical short, or risk 70 to make 30 on a dollar-wide spread. This is a great risk/reward mentality as it ensures a higher Prob Of Profit, but you will never be able to implement this type of risk/reward strategy as far out as 1-Stnd Dev. At that range, you can realistically expect to collect $0.10 to $.15 on dollar-wide spreads. Risking 70 to make 30 typically happens at around 60% prob OTM, not 84%. Collecting 1/3 the width of your strikes at 1-SD (84% prob OTM) is simply not possible under average conditions! There's no such animal in the zoo! If you do find this white buffalo, let me know. THE MATH IS FLAWED Also, the math on this is flawed. If we say our strategy is right roughly 80% of the time (we win 8 out of 10 trades), we're still wiping ourselves out because our losers are always collectively bigger than our winners (because we're managing our winners at 50%). So you do the math on 10 x dollar wide vertical spreads: With 8 profitable trades, I collect $1.20 (that's $0.15x8...remember, I'm managing winners at 50%) With 2 worst-case losing trades, I lose $1.40 ($0.70x2....twice where I've lost the full amount) So, I had 8 winners and 2 losers, but I was sidelined by the fact that my 2 losers outdid my 8 winners for an overall $0.20 loss. And guys, this doesn't even include the $0.06 round-trip commissions per vertical spread. You add that in there for all 10 trades and you're out an extra $0.60 for a grand total loss of $0.80. "Trade small, trade often" is a great way for them to collect commissions off of you if you don't have a strategy that can effectively employ based on that mantra. This strategy will drain you! YOU HAVE TO BE DIRECTIONAL I can't even tell you how many times I've tried to employ this strategy when I first started out: selling puts at 1-SD and simply hoping the option doesn't go into the money. 84% prob OTM seems nice, but believe me that a stock CAN and WILL come up to test you and eventually sideline you if you simply apply a random-walk approach. Even attempting to be directional is, at the end of the day, a coin flip unless you've confirmed market direction based on price action (a whole different ballgame/art form in and of itself). FIND YOUR OWN WAY Sorry to crush dreams....but I hope this helps. I have immense respect for the Tasty Trade guys. Some of what they say is applicable to the way I trade, but the bottom line is that YOU MUST find what works for you. NOBODY is going to simply hand over the keys to the kingdom. Think about it...if all of the tasty trade subscribers/followers were making money with this strategy, then the word would spread like wildfire and the equilibrium of our capitalistic market would be thrown off kilter, inevitably crashing the Street and toppling our economy. Long story longer, if EVERYONE knew how to get consistently make profitable trades, then our market wouldn't stand. People with working strategies keep it close to the chest (the 5 percenters, I call them). The MAN doesn't want people like you and I stepping out of place. They want you right where you are...listening to miss-information on MSNBC and the Street.
Andrew W. (8 months ago)
So here's the problem with your math and methodology: The only problem is that you don't have to take the full loss and they recommend that you don't... If you have an 80% chance of being in the money, the probability of getting a losing trade is already low, not to mention you would purposefully need to lose money to make this strategy a loser. If I can make profit on a trade 8 times, but limit my losses to 25% per loss (2 losses) of what I've earned over those 8 occurrences, then I've effectively given myself a 2:1 risk-to-reward ratio. Example: I earned $120 over 8 wins and lost $60 over those 2 losses. You would PURPOSEFULLY need to lose more than $60 on those two trades when the price moves to statistical extremes outside of 80% probability. I think your frustration comes from not being a good trader, honestly.
Keith Cannon (8 months ago)
However, the value in their strategy is in my opinion still there if you can apply it after some sound analysis as to direction.
Keith Cannon (8 months ago)
People somehow think you can sidestep the initial selection process of taking a bullish/bearish outlook. Its a classic conditional probability case; random is random, but getting a straight is A LOT more likely if you know that you already have a 10 and a 9.
Yan Wang (1 year ago)
Great comment. I wonder if they truly believe in what they're saying.
Hey handsome (1 year ago)
good comment, keep up the good work and spread the truth. There are more and more people thinking selling options has an edge over buying which is totally wrong and misguided.
Dan Casey (3 years ago)
Is the 1 SD skewed to below the strike price when selling puts?
Mike K (3 years ago)
When the current price is already out of 1SD, where do you place the strike price?
Mark Handley (4 years ago)
What is the formula for calculating 1 or 2 standard deviations from the price of a stock?
Supernova (2 years ago)
+Mark Handley . You need to export the data from yahoo finance or such. Then you can input the formulas in excel. Plenty of youtube videos show how to calculate STDEV. Not difficult.
Jean-Philippe Montout (4 years ago)
great start training in option and stat.
mego (4 years ago)
But one loss is enough to take four times profits gained , if there is any strategy can cover this problem i will be the richest man in the world
yelnatz (4 years ago)
+mego Uhm, if your legs are getting tested, you're supposed to play defense. Watch the last few episodes of Where do I Start with Case about it. Learn more.  Why would you just let it get exercised? ...
charles ford (4 years ago)
That guy is an Idiot...
Hey handsome (1 year ago)
Yeah he made most of that 400 million from selling his think or swim platform to TD. And he's telling everyone to trade small and often because he get a cut of commission from TD ameritrade. And guess what when you sell options most of the time you need to hedge and that will cost you more in commission. Those who teach about selling options mostly have conflicts of interest because they are introducing broker
Duy Pham (1 year ago)
an idiot who makes 400+ millions of dollars =)))
Fanny Fx (5 years ago)
Comparing to other similar sites: • We pay more: 50-80%, others 30% or much less • Faster: we pay till the 5th of next month, others on 25th or later. • We have more brokers: over 70 at this moment and are adding new ones all the time. • We use many payments methods: PayPal, Webmoney, AlertPay, Moneybookers, Neteller, Credit Card, Bank, etc. Others only Bank or PayPal. • And there are many more things that distinguish us and our program from the others.
crayon851 (5 years ago)
hes actually worth about 600mil according to google. But alot of these selling options at low IV, is very optimistic in that you cannot really get a good sell price within 30-50 days, unless you go within 5% of the current price. but given the average IV they are all above 50%, and selling outside 1D doesn't cover these probabilities.
Pay Pip (5 years ago)
You don't stay on the floor of the CBOE for any amount of time if you don't make money. The guy's never drawn a paycheck so I'm guessing he's done well over the years.
xwhite2020 (5 years ago)
He.sold.TOS.for.750million.Do.you.homework
xwhite2020 (5 years ago)
Says.nothing.about.yeild.read.it.again
crayon851 (5 years ago)
I also did the math and this isn't really realistic considering most popular options have IV +50. example IAG , to short put 1 SD below the stock price of 5.44, the lower limit strike would have to be below $2. which yields next to nothing. so in reality you cannot make a good profit off this.
crayon851 (5 years ago)
Why would you use the current price as the center point? so you calculate the upper and lower limits of the current price based off the implied volatility? ex IV=10, current price = 10, upper =11, lower =9, so a strike of 8 would be ideal?
jonesr227 (5 years ago)
Let the current price be at the center of the bell ccurve; then 1 SD variation contains 68% of the area, with a remaining 16% of the area on the high side and another 16% on the low side. So if you sell a put at 1 SD below the current price then there is 84% (68+16) that is above the put strike price. So there is 84% chance of expiring OTM.
crayon851 (5 years ago)
I dont get how selling out of the money 1 std yields 84%(68+16). Wouldnt the percentage be under 34+16%+ remaining?
Nilu Pradhan (5 years ago)
hi Nasruddin, You seems to be vey accomplish trader culd you please upload something how elliot wave +sd+atr is an incredible edge. it would be great help
jimbojones (5 years ago)
I would give you a 1000 likes but it'll take me forever. So I give you 1000 typed likes!
Anwar Jahid (5 years ago)
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Horace GreenLeaf (5 years ago)
The market does not obey gaussian distribution
Nasrudin Salim (5 years ago)
Other than the SD. You can also use the ATR, Average true range. You could have SD + ATR + Eliott wave count. That's an incredible edge. Not only do you know that it has a low probability of being in the money for selling puts/calls. But you also know when to stop selling calls/puts cause you know when the BigBoys have reversed their positions using eliott wave analysis
Nasrudin Salim (5 years ago)
Count eliott waves to judge trends and the strengths of the trends. See volumes for Volume spread analysis. If you counted the eliott waves and it seems that the trend is losing momentum at wave 4 /5. Then stop selling puts. But if the eliott wave has still not ended, then you can continue selling puts+ 1 SD below stock price. Do inverse for selling calls.
Daniel Chang (5 years ago)
I agree with that. Part of the equation however is, how do you define a move? I don't think it's as clear-cut as appears on a chart.
Eli Steinberger (5 years ago)
One MAJOR problem. The market doesn't fit the Normal deviation distribution. The chance of 5*SD move is 1:100000. In any given day, you have stocks moving 5*SDs. The market itself made 5*SD moves 5 times in very recent history.
Sheshagiri Pai (1 year ago)
Those are called 'wipeout' outliers :).
Rob W (5 years ago)
Think or Swim does it for you.
Don Peirce (5 years ago)
How do you calculation Deviation?

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