Lesson Overview

Fatal Pricing Errors

We'll take a possible TWTR trade today and look deeper into the #1 fatal error people make that traps them into a losing cycle before they even begin to make money with options trading.

We tackle this head on in our very own "Coin Flip" case study. Over the years coaching hundreds of students I've used this same study to present the idea of getting fair or reasonable pricing when selling option spreads and it's changed how people enter trades for the better.

Once you complete this video you'll have a firm understanding as to why some traders still can make high probability trades month after month yet lose money.

More Discussion

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  • Marcus

    Hi Kirk, when you mean net credit, is it after commissions?

    I’m finding it hard to fulfil price conditions. For eg. If probability of success is 15%. To take in a net credit of 15 dollars and only risking 15% of my capital is hard to make it a ‘fair trade’.

    Am I doing something wrong here? And what adjustments can one make to get better pricing.

    • No that’s before commission because those can vary greatly from broker to broker. Yes it is hard to find trades like this which makes them worth it. It gets a lot easier when the overall market has high IV. Also try widening out the strike prices in some case – might help.

  • Marcus

    In this case study you used.

    You’re risking $85 of capital to make $15.
    Shouldn’t the percentage of risk be 15/85, instead of 15/100?

    When we hit confirm and send.
    Does the buying power effect in brackets, and the ‘max loss’ shows the ‘total capital’ we put up for the particular trade?

    Marcus

    • Yes you could look at it that way. I like to look at the credit as part of the width of the strikes as far as risk because then I’m always overly conservative on making sure I’m taking in enough money on the sell.

  • Kevin Kettring

    Besides the greeks, this was the most helpful training video I have ever saw. Good Job
    on this, control slippage, and commissions. I work my orders if I can save a penny on the fill,
    that makes it a commission free trade, think or swim will close a trade at 0.05 for free.
    I couldn’t see leaving the platform as the technology is cutting edge. I know other brokers
    have cheaper rates, not by much, you have to think of commissions as the cost of business.

  • Midpoint is a great way to counteract this for sure.

  • NC

    Wow, great job! One of the most important videos in my eyes, the key to success! That was really an eye-opener for me!
    Cheers, NC

    • Awesome please share it online to help spread the word for us NC!

  • Let me know if you get it working!

  • Larry Ihde

    Great video, so what is a rule of thumb for net credit you should look for per dollar of spread?

    • Credit is = to the % risk of the trade going ITM. So a $1 wide spread with a 20% risk of being ITM should be taking in $0.20 of credit.

  • Either fair pricing which is great because we always know we’ll win our more than the probabilities show at the initial entry – or “alpha” pricing where you are being compensated more than the risk – very rare.

  • Erik

    Kirk:

    A great discussion on the undenyable truth of statistical math. This Fatal Pricing Errors should be part and particle of your 7-step trade entry checklist. It would verify, especially on your credit trade set-ups, that you are getting enough return on the risk at trade initiate.

    Erk

  • You’d still ideally want to still paid something below the probability of losing.

  • You want to take the combined probabilities but yes you won’t lose on both sides.

  • Example: Sell the $125 call and buy the $130 call ($5 wide spread). The $125 call has a 15% probability of being ITM so you’d want to collect 15% of $5 wide spread which is 0.75 credit overall. Again this is the ideal case.

  • You’d still want to take profits early but yes if your credit after commissions is too small you can wait a bit longer.

  • Correct

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