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Looks like a 1:3 reward/risk at max loss. If correct, what is the logic behind this trade?
From initial trade yes. However, because of the high probability of profit (being around 80% just based on options pricing) and probably another 10% on top of that with being at a key level of a right shoulder, and above a Supply level. So I’m expecting this to be a 90% trade. So even if I took this 10 times and made $1.05: 9 Times and lost the other $3.95 the 1 time it’s still a vary solid profit expectation.
Saying that, If a trader feels more comfortable placing a stop around $2.10 to lower the risk that would be ok also (Making it 1:1 but still solid technically). The odds will decrease a little if you place the stop but it’s still a very solid game plan.
Hope this helps.
I didn’t ask the question but I thank you for the reply, Tyson–helps understand the trade-off and probabilities. (Though every broker I’ve used the last 20 years does not allow stops on spreads, only single options. So I have to place an alert for the stock price level.)
Hi Mike, Technically you can place a stop after entering the trade by doing the opposite of the credit. So if you entered the $80-$85 Bear call for $1.05 credit. You can go in a set a Buy to close the $80 and Sell to close the $85 for say a debit of $2.10. As an example of a stop.
Hope this helps
Thanks for taking the time to reply, Tyson! I do know what a stop is on a spread, it’s that most brokers (at least the four I’ve used, including Schwab) do not allow me to place them as a stop, only as an active order. If I placed the BTC order above, it would be immediately filled for a loss. They only allow stops & conditionals on single options (i.e., if XYZ hits A, STC a call or put for X). Hopefully once Schwab makes the full transition from SSE to ToS the web-based version will allow it (I don’t use the desktop ToS, only the web version).