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Limiting profitability

There is a direct relationship between profitability and probability of success. The higher the profitability, the lower the probability of success. At tastytrade, we limit our profitability to increase our probability of success. We do this by reducing our cost basis and by selecting our strikes strategically, to give us a high probability of success. This is one of the hardest concepts to grasp as a new trader so we like to use a baseball analogy to explain the concept…

Lets pretend that in baseball, you have a choice when you are up to bat. You can either enable the ability to hit a homerun and receive a random pitch each time, or you can disable the ability to hit a homerun and receive a strike right down the middle each time. The player who chooses to enable home runs allows the pitcher to control the game. The player who chooses to receive a strike each time and disable home runs, knows exactly what they are getting into when walking up to the plate. They will still miss from time to time, but their batting statistics should increase dramatically if their batting mechanics are consistent.

At tastytrade, we are the batter who eliminates home runs. We limit our profitability to increase our probability of profit and we allow these probabilities to play out over time by trading small.

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