The 3 Choices
Buy, sell, hold. As a trader, these are your only 3 choices, all the time, for every position. There are 3 possible results, too. You profit, you lose, you break even. The number 3 is the single most important number for a trader.
The Monty Hall Problem refers to the game show, Let’s Make A Deal. In the game, you are confronted with 3 doors. You have one opened for you – and then you can keep what’s inside or give that prize back and switch to another door. Your hope is to improve your position with the second choice. The Monty Hall problem proves, mathematically, that your chances of success are increased when you switch doors after the first choice. This would only happen if you are unhappy with the contents of the first door, obviously.
We apply this to options in the following way: You open a position by selling a naked put. As time and your position unfolds, if you are profitable you may choose to keep the contents of that door. If you are unprofitable after opening that first door, your mathematical odds of improving the position are now in your favor if you switch doors. Or, to put it terms an options trader understands …. If your naked put is not working out like you had hoped, quickly admit that and work to change your position based on the new information you have gained. As you open a new position, you have a 66% chance of failure. You will either lose money, make money, or break even. Only one of those will happen, and two will not. Odds are you end up with “lose money” or “break even”. But, if you start losing money, then you have two other results available if you make a “switch”. Alter your option position, and now you have thrown out one of the three results and put yourself in a position where the chances of success are not the original 33%, but NOW they are 66% in your favor.
When you open a new option position that makes money if stock XYZ goes up, but XYZ goes down, switch your position to one where you make money if XYZ goes down. Improve your odds of success. Be open to change. You must react to the market – it does not react to you. This is a cold, mathematical way of looking at your odds of success with any new position. If you know how to start with mathematical odds of 66%, then multiply that with your brain’s power of analysis – can you see how your chances of success are greatly increased?
Stay Optioned, My Friend!