Probability Considerations In Option Trading Strategies

In option trading it is possible to find out which of several potential trades offer the highest probability of generating a profit. Doing such analysis is always time well spent. However, as with all aspects of option trading, there are tradeoffs here too.

For example, if you buy a deep in-the-money call option, you have a much greater probability of profit than if you buy a far out-of-the-money option. But, if the underlying security makes a huge move in the anticipated direction, you stand to make a lot less money than you would if you bought the far out-of-the-money option because the out-of-the-money option offers greater leverage.

In the end, probability analysis allows traders to determine which of any number of potential trades they are most comfortable with, given their own preferences for reward and risk.