Quick question: If you have a trading strategy that wins 50% of the time and loses 50% of the time, can you still make money over time?
I have two trades as an example that will help answer that question.
Yesterday I posted about two EA trades, long gamma on $DELL, short gamma on $COST, and guess what? One was a winner and the other was a loser. 50/50 outcome.
[https://www.reddit.com/r/options/comments/1tqec3p/dell\_and\_cost\_earnings\_today\_atc\_iv\_rich\_for\_one/](https://www.reddit.com/r/options/comments/1tqec3p/dell_and_cost_earnings_today_atc_iv_rich_for_one/)
$DELL had a massive beat and spiked more than 33% on today's open. I went long an IC on last night's close that maxed out its profitability this am. I entered the trade for $0.98 debit and exited the trade with a $2.50 credit. Return on invested capital? 153%.
Not so good with $COST. It had a slight beat, less than 1% versus consensus. During the ON trade, things were looking good because I was short an IC and the stock barely budged.
Experience has informed me never to count a trade as a winner until price discovery occurs on the morning after EA. $COST is just the latest data point.
Despite barely moving overnight, immediately upon the open, $COST traded lower by more than 4%. I had shorted an IC on last night's closed for a credit of $1.95. This morning, my short put was deep ITM so I covered at \~10 a.m. for $4.25. Net result? -75% return capital at risk.
So at the end of the day, what was my net outcome?
A winner!
Deploying 1% of portfolio capital in each of these two trades, $DELL returned a profit of +153 bp to my book. $COST cost it -75 basis points. Net result: +78bp.
An options trading strategy that is predicated on asymmetrical payouts, strict risk management, and disciplined trading rules, will pay off in the long run, even if you are only right 50% of the time.
On to the next trades!