But won't the stop loss also significantly reduce your probability to win? You basically loose all your potential winners, where you would have won until expiration but got stopped out. Hence, the probability to win decreases and the probability to lose increases substantially. I am not sure whether you then still have a positive EV
But won't the stop loss also significantly reduce your probability to win? You basically loose all your potential winners, where you would have won until expiration but got stopped out. Hence, the probability to win decreases and the probability to lose increases substantially. I am not sure whether you then still have a positive EV
Hi Marvin,
No, quite the opposite.
The EV (simplistic short hand formula) is the (probability of option expiring OTM* max gain) + (prob of expiring ITM*max loss).
You turn the EV positive or even more positive via reducing the max downside to = the amount of premium received (also = max gain)