Secret 60THE SECRET WEAPON OF OPTION ANALYSIS

To beat the option game, you need to use the best technology

available. Simulation is the closest thing to a crystal ball in

the option markets. I have been using simulation since the

1970’s and used it in my book, The Option Player’s Advanced

Guidebook. In the 1990’s, I put my simulator in our Option Master

Software. Since then, several other firms have started using

simulation.

Simulation enables you to determine the probability of hitting

a profit goal or stop-loss price based on the underlying security

or futures. For example, if you planned to buy the January

Pfizer 45 call on October 15, when the stock is 41, what are the

odds of hitting 47 by expiration? A simulator and probability calculator

would tell you.

However, a simulator can also tell you the probability of hitting

a stop-loss during the life of the option. Here, a regular

probability calculator would not be as helpful, for it only tells you

the probability if held till expiration, and with a stop-loss you

need to know what happens during the life of the option. The

stop-loss must be based on the underlying security or futures, for

you are simulating the action of the underlying instrument.

The simulator in Option Master® also enables you to add a

bullish or bearish bias to the simulation. Personally I would

avoid that feature or enter a small bias, for as demonstrated in

this book, we all have a difficult time predicting the future, and a

high majority of us are usually wrong.

Altogether, I consider a simulator invaluable, for it gives you

a much better view of whether you have a good or bad play, and,

as a result, it gives you a big advantage in the option market. It

also forces you to plan your trade before you enter it and to develop

a game plan by setting profit goals and stop-losses. If the

prediction from the simulator doesn’t look good, pass on the

trade.

To beat the option game, you need to use the best technology

available. Simulation is the closest thing to a crystal ball in

the option markets. I have been using simulation since the

1970’s and used it in my book, The Option Player’s Advanced

Guidebook. In the 1990’s, I put my simulator in our Option Master

Software. Since then, several other firms have started using

simulation.

Simulation enables you to determine the probability of hitting

a profit goal or stop-loss price based on the underlying security

or futures. For example, if you planned to buy the January

Pfizer 45 call on October 15, when the stock is 41, what are the

odds of hitting 47 by expiration? A simulator and probability calculator

would tell you.

However, a simulator can also tell you the probability of hitting

a stop-loss during the life of the option. Here, a regular

probability calculator would not be as helpful, for it only tells you

the probability if held till expiration, and with a stop-loss you

need to know what happens during the life of the option. The

stop-loss must be based on the underlying security or futures, for

you are simulating the action of the underlying instrument.

The simulator in Option Master® also enables you to add a

bullish or bearish bias to the simulation. Personally I would

avoid that feature or enter a small bias, for as demonstrated in

this book, we all have a difficult time predicting the future, and a

high majority of us are usually wrong.

Altogether, I consider a simulator invaluable, for it gives you

a much better view of whether you have a good or bad play, and,

as a result, it gives you a big advantage in the option market. It

also forces you to plan your trade before you enter it and to develop

a game plan by setting profit goals and stop-losses. If the

prediction from the simulator doesn’t look good, pass on the

trade.