Lesson Overview

Understanding The Math

Welcome back to statistics class. Undoubtedly more important that understanding the Black Scholes model for pricing (which we purposesly don't cover) is your ability to understand statistics and probabilities on a deep level.

We would even venture to say that your understanding of the "math" behind our trading system is directly related to your success rate and end of the year profit.

If you don't get the math behind the trades you will fail - guaranteed!

Swallow your pride and head back to school with us as we talk in depth about standard deviations, probabilities and statistics in this advanced tutorial.

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  • All option pricing is based on implied volatility for that particular contract month (which is why option prices are always overstated long-term compared to the HV moves that actually occur). You should be looking at IV index not the IV of a particular option and soon we’ll be rolling out this feature as part of our own watch list we developed here: https://optionalpha.com/members/watch-list

  • Sanchez

    We sell when IV is high in the hope it contracts?

    • And knowing that the higher it is, the more overstated it becomes.

  • Short-term you’re going to have less of a normal distribution as you would long-term with more trades or data points. The key here is to realize that short term success or failure when trading options is not indicative of long-success. If you are consistently selling options as the main core part of your strategy then long-term when lots of trades play out you’ll find yourself on the winning side.

  • Yes to probability curve is future looking but what I was saying was that implied volatility to some degree looks at past movements so trades can then predict what future movements might be.

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