When setting up our trades, it's important to pay attention to the expectations of the market and then find a balance between the risk and reward of our trade.
We can use the probabilities associated with options at various strikes to gain a sense of the likelihood of the underlying reaching a certain price by the option's expiration date.
While the platform shows us the probability of a strike being in or out of the money at expiration, it's important to understand where these values come from.
On today's show Beef and I explain how we can use implied volatility to derive the probability of a stock price reaching a certain level over a specific period of time.
We also use the tastyworks platform to illustrate and explain how we can use these probabilities as a gauge for what the market expects and then find a balance between the probabilities, option prices, and our assumptions, when setting up our trade.
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