Posted in Strategy
By: Tom Gentile on November 1st, 2021 • 3 mins read
I meet people all the time that want to trade with high probability and receive nice monthly returns, but don’t want to babysit their trades. Essentially, they’re asking for the best of both worlds… high probability of profit and not spending much time making it. Stock trading doesn’t require a lot of time, but getting direction right is a tricky thing and even if one is right about direction, the returns are modest compared to options.
So, is this holy grail available?
I have a system that provides 90% probability of making an average of 10% ROI per trade (losers included). Annualized, with an average trade length of about 2 months, this system produces about a 60% annual return. Compounded, that’s a 214% return or over tripling your money.
The system utilizes bullish credit spreads (bull put spreads) that are placed so far Out-of-the-Money (OTM) that the probability of them expiring worthless is around 90%.
An Example of High Probability: Target (NYSE: TGT)
Here’s an example on a stock you’ve heard of: Target (NYSE: TGT).
Back on January 2, 2021, my scanner presented the following trade.
The statics show that this 74-day trade has a 94.13% statistical probability of making 18.48%.
Here’s the risk graph that shows the whole story.
The trade is constructed by selling an OTM put and buying the underlying put, creating a bull put spread. In this case, we’re selling the TGT March 19, 2021 $155 Put and buying the TGT March 19, 2021 $150 Put receiving $78 credit on $422. That’s a maximum ROI of 18.48%.
Now, the good news is that the 18.48% ROI is realized as long as TGT stays above the short put $155 strike by March 19, 2021.
The best news is that the chance of this NOT happening is 94.13%.
The risk graph above shows it all.
On the right side of the vertical black line is profit. As you can see, TGT would have to drop a lot for this trade to get close to losing. TGT can go anywhere and as long as it stays above $155, cha-ching!
After the Trade Results
Here’s how the trade worked out:
Despite dropping hard at earnings (green “E” triangle), this trade survived the punch and expired worthless on the expiration date of March 19, 2021 for maximum profit.
To reduce the time in the trade, I put a Good-Till-Canceled (GTC) order to buy the spread back for $0.05, capturing most of the potential profit. Unless the stock drops, this will get you out of the trade in around 2-months. If the stocks rises, you’ll be out sooner.
Use the short put strike as your stop loss. In other words, unless the stock closes < the short put strike, let ‘er ride.
How do you Find High Probability Trades?
I use a scanner. Here are a few trades that came out of my scanner today:
Each of these have over a 90% probability of profit offering at least 16.69% ROI over the next 64 days.
If you don’t have my scanners, try selling 90-day OTM bull put spreads that bring in about 15% profit. You won’t know the exact statistical probability, but you should be in the ballpark of 80%+ probability of profit.
Utilizing a system that provides 90% probability of making an average of 10% ROI per trade. with an average trade length of about 2 months can produce about a 60% annual return. Compounded, that’s a 214% return or over tripling your money.