Stocks are off to a hot start for the second half of 2020.
Of course, there’s a lot of greed going on in the market and traders may be getting too complacent.
When that happens, there are more “stupid” bets in the market.
Specifically, I’m talking about the options market.
I’m noticing there are so many traders just buying way out of the money options… thinking the stock will move to their favor.
However, what they don’t realize is that they’re at a statistical disadvantage when they do that.
For me personally, I want to uncover these “sucker” bets and take the other side of them…
Today, I want to show you how I hunt down these sucker bets and use a risk-defined strategy to take advantage of them.
In order to find the sucker bets, I look for trades placed on out of the money options.
Well, think about it like this…
It a stock is trading at $200, and someone buys $100 puts expiring in two weeks…
They either know something, or they’re just placing a long-shot bet.
You see, the move is unlikely… and chances are it’s going to happen, and unless that bet is large enough…
It’s probably just a “gambler” who’s throwing their money away.
Ever since I started to think about options trading in terms of odds, it made things so much simpler.
You see, I was once one of those traders who would buy far out of the money options, thinking the stock would move to my favor.
What I didn’t know was that I would need the stock to move a lot, and the implied volatility would need to rise too.
Not only that, but time was working against me.
Now, I just look for options trades where the odds of winning are high.
In order to find these trades, I look at my scanner.
Here’s a look at some trades it picked up the other day.
One trade that popped up was Apple Inc. (AAPL). The trade I’m looking at here is the $330 put activity.
Someone actually bought $330 puts expiring on July 17, when the stock was trading at $366.46.
That means they would need the stock to drop by nearly 10% before the expiration date, or about $36 at the time.
To me, that’s a sucker bet… and one that I would gladly take the other side of.
Now, I know what you’re thinking…
Jason, isn’t naked selling options dangerous?
Yes, it is.
That’s why I use a risk-defined strategy to place the trade.
For example, if I were to set up the trade, I would look to sell the $330 puts, while simultaneously buying further out of the money puts, say $325.
That way, if AAPL actually drops and gets to that level, my bet is hedged.
When I set up the position, I know exactly what I stand to make or lose… and that way, I can go to bed and not have to be up all night thinking about my position.
By taking that bet, the odds are stacked in my favor because if you look there was less than a 16.46% chance those options will expire in the money.
In other words, if I took the other side, the chances of me winning is greater than 80%.
Now, if you want to learn more about this strategy and how it all works… I’ve created an eBook, Wall Street Bookie, which details my number 1 edge in the options market.