Secret 7BEWARE OF LADY LUCK

Most investors invest by the seat of their pants, and when

they are successful, they believe they can predict the markets. In

many cases, it is a matter of pure luck.

When you buy options, your odds of winning on any play are

lower than most people think. My Complete Option Report track

record in the 80’s showed two years with an overall percentage

return of over 1500%, but only 20% of the positions recommended

were profitable. Your probability of winning when you

buy options will always be less than 50% in a random market.

Furthermore, with out-of-the-money options, that percentage

can drop dramatically.

Here it is important to understand your odds of winning.

Millions of people buy lottery tickets, yet your chances of winning

the big prizes are so remote that you have the same chance

of winning whether you play or don’t play. State lotteries are

actually a voluntary tax system. Knowingly or not, people who

play are making a voluntary tax payment to their state.

In the casinos of Nevada, there is an ancient game of Keno

where twenty numbers are picked from one to eighty. Fifteenpoint

Keno, where you try to pick fifteen out of twenty numbers,

pays $100,000 for a $1.00 ticket. What are your odds of winning?

Your true odds are over 430 billion to one. Of course, no one has

ever hit the fifteen-spot Keno, and they never will, but thousands

of gamblers keep trying.

Throughout the book, we will emphasize how to measure

your odds of winning when you trade options. However, even if

you know your odds of profiting, Lady Luck will try to trick you,

for in the world of probabilities, there are winning streaks and

losing streaks.

Here is an example: during the 2001 National Basketball

League (NBA) playoffs, the Sacramento Kings in one game

missed twenty-two 3 point shots at the basket in a row, and they

were one of the highest scoring teams in the league. Now a NBA

player should hit a 3 point shot about 35%–40% of the time, so

even if your odds of winning approaches 50%, you still can have

long losing streaks. Therefore, even if you are doing everything

right when you trade options, you could incur a long losing

streak.

Such streaks discourage the option trader. Many quit or

change their system or methodology and start making the wrong

moves, extending their losing streaks. We see this behavior frequently

with baseball players. When they go into a slump and

cannot get a hit, they change their style of hitting and slip into a

greater slump.

Lady Luck has a tendency to make us look very brilliant or

very stupid. Consequently, as you trade options, beware of Lady

Luck. If you are an option buyer, be prepared for losing streaks,

stick to your game plan and don’t get discouraged.

Of course, this is difficult to do and is a major obstacle for

the option buyer. If you can’t handle a lot of losses, then you

might want to consider option strategies with much higher probabilities

of profit, which we will disclose in future chapters.

To reiterate, as you trade, beware of Lady Luck and don’t let

her trick you into making the wrong move!

Most investors invest by the seat of their pants, and when

they are successful, they believe they can predict the markets. In

many cases, it is a matter of pure luck.

When you buy options, your odds of winning on any play are

lower than most people think. My Complete Option Report track

record in the 80’s showed two years with an overall percentage

return of over 1500%, but only 20% of the positions recommended

were profitable. Your probability of winning when you

buy options will always be less than 50% in a random market.

Furthermore, with out-of-the-money options, that percentage

can drop dramatically.

Here it is important to understand your odds of winning.

Millions of people buy lottery tickets, yet your chances of winning

the big prizes are so remote that you have the same chance

of winning whether you play or don’t play. State lotteries are

actually a voluntary tax system. Knowingly or not, people who

play are making a voluntary tax payment to their state.

In the casinos of Nevada, there is an ancient game of Keno

where twenty numbers are picked from one to eighty. Fifteenpoint

Keno, where you try to pick fifteen out of twenty numbers,

pays $100,000 for a $1.00 ticket. What are your odds of winning?

Your true odds are over 430 billion to one. Of course, no one has

ever hit the fifteen-spot Keno, and they never will, but thousands

of gamblers keep trying.

Throughout the book, we will emphasize how to measure

your odds of winning when you trade options. However, even if

you know your odds of profiting, Lady Luck will try to trick you,

for in the world of probabilities, there are winning streaks and

losing streaks.

Here is an example: during the 2001 National Basketball

League (NBA) playoffs, the Sacramento Kings in one game

missed twenty-two 3 point shots at the basket in a row, and they

were one of the highest scoring teams in the league. Now a NBA

player should hit a 3 point shot about 35%–40% of the time, so

even if your odds of winning approaches 50%, you still can have

long losing streaks. Therefore, even if you are doing everything

right when you trade options, you could incur a long losing

streak.

Such streaks discourage the option trader. Many quit or

change their system or methodology and start making the wrong

moves, extending their losing streaks. We see this behavior frequently

with baseball players. When they go into a slump and

cannot get a hit, they change their style of hitting and slip into a

greater slump.

Lady Luck has a tendency to make us look very brilliant or

very stupid. Consequently, as you trade options, beware of Lady

Luck. If you are an option buyer, be prepared for losing streaks,

stick to your game plan and don’t get discouraged.

Of course, this is difficult to do and is a major obstacle for

the option buyer. If you can’t handle a lot of losses, then you

might want to consider option strategies with much higher probabilities

of profit, which we will disclose in future chapters.

To reiterate, as you trade, beware of Lady Luck and don’t let

her trick you into making the wrong move!