Many traders suffer from inconsistency, which leads to constant losses that eventually destroy their self-confidence.
Here, they talk about a great strategy that may increase your winning rate up to 90%. You will perform very effective trades with excellent risk to reward. The key metric would be the win rate at 90%.
Options traders make use of an important metric that would lead them to a 90% win rate: Delta. Delta represents the rate of change of the option’s price relative to its underlying asset price change. So, by using options with a Delta of 10, for example, they statistically have a 90% chance that their trade will work out well. That is a foundation of options strategies used by professionals.
The Tesla Example: An Application in Reality
Background:
Tesla’s stock had a rather challenging year in 2022, falling by 70%. By the end of the year, it entered oversold conditions, as suggested by the RSI oscillator dipping below 30. Therefore, many traders started 2023 with a bullish view, looking for a potential bounce in the price of Tesla.
The Strategy:
To reduce risk, a professional options trader may select a Put Credit Spread strategy. This involves selling a higher strike put option (in this case, 105) while buying a lower strike put option (100), creating a spread.
Understanding the Trade: Delta and Its Impact
Delta Calculation:
The Delta of the 105 put is 10, meaning there’s approximately a 90% chance that Tesla will close above this strike price as the option expies in 60 days. For selling these puts, you are paid a premium while the purchased puts serve to protect in case the price falls below the strike price.
Trade Breakdown
- Sell 10 of the 105 puts for $2.93
- Buy 10 of the 100 puts for $2.34
- Net positive cash flow: $590
- Required capital: $4,410 (worst-case loss)
Results of the Trade
Tesla’s Performance:
As of mid-February 2023, Tesla’s stock went on a rampage, closing at $208.31, way above the 105 put strike. The 105 and 100 puts both expired worthless, meaning the trader pocketed the initial cash flow of $590 as profit.
How the Metric Ensures a 90% Success Rate
The trader tries to get options that have a 10 Delta, meaning that the chances are very high, almost 90%, that the options may expire worthless. The strategy is set up for a win every time as evidenced by winning in multiple trades made each year. The beauty of this strategy is in its statistical probability of the options turning worthless, hence risking the lower return while making more money.
Example in Real Life: A Year of Winning Trades
Let’s walk through how the trader used this strategy throughout the year:
February Trade:
Sell 10 of the 105 puts and buy 10 of the 100 puts
Result: $590 in profit
April Trade:
Sell 10 of the 145 puts and buy 10 of the 140 puts
Result: $600 in profit
June Trade:
Sell 10 of the 125 puts and buy 10 of the 120 puts
Result: $470 in profit
Full Year Summary
In a year, he executed 6 trades and pocketed a net cash flow of $3,370.
The maximum capital utilized for any trade during the year was $4,530 during June. He garnered a return of 74 percent in 12 months.
Risk Management: Overcoming Losses
Though the win rate for this strategy is very high, every trade would not be successful. If the stock price closes below the short put strike, the trade can result in a loss. Professional traders often set up line-in-the-sand levels to adjust their trades and minimize risk. For example, if the Delta increases (indicating a greater risk of the trade not expiring worthless), traders might roll down their positions to safer strikes, ensuring a higher probability of success.
Conclusion
The secret to getting a 90% win rate through options trading is in the Delta metric and its application. If you would choose a low Delta of 10 to buy options and then set up strategies like the Put Credit Spread, you can easily and consistently create high-probability trades that consistently work for you. The results of the Tesla example and its year-long campaign tell you that the approach is impressive and very low risk, followed by a long string of success in options trading.