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Gambler's Fallacy

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The gambler's fallacy is the belief that a certain trend will reverse or continue into the future.

A lot of traders have the misconception that a trend will dictate future price movements.

For example: This stock has been up the past week. I think we’ll see continuation on Tuesday.

Now let’s say your past three short 16 delta strangles in SPY are losers averaging -$100 per trade.

Does this mean that you should place a larger position next time expecting that your P/L will revert back to the long term average of $67?

Absolutely not. Doing this simply exposes you to more risk, while your probability of profit on this hypothetical large trade remains the same at 83%.

Do not abandon the mantra of trade small, trade often.

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