The Option Alpha Podcast 8: Breaking The "Zero-Sum" Probability Trading Cycle In Your Favor
Nov 17, 2014
Explore the misconception of the zero-sum game in probability trading, illustrated with a coin-flip analogy. Discover the importance of long-term trading and the power of making many small trades. Learn to close winning trades early to secure profits, while holding defined-risk losers that may rebound. Real-world examples from Home Depot and Goldman Sachs highlight these strategies in action. This discussion will challenge your approach to trading and empower you to think differently about your choices.
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Why Probability Trading Looks Zero-Sum
- Probability trading appears zero-sum because small frequent wins can be wiped out by rarer large losses.
- Kirk explains the zero-sum misconception using coin-flip and options probability examples.
Commit To Many Small Trades Over Time
- Trade many small positions consistently and commit for years to let probabilities play out.
- Kirk warns this approach only works over lots of trades and long time horizons.
Model Risk With A $1 Wide Spread
- Use a defined-risk spread example to size your potential gain and loss before trading.
- Kirk models a $1 wide call credit spread taking $0.30 credit with $0.70 risk to illustrate math and sizing.