For this segment of Best Practices, Tom and Tony talk about Probability and Standard Deviations. tastylive always talks about putting on high probability trades. So, where should we place the short strikes?
To know our strike placement, we must first assess how much risk a trader is willing to take relative to the reward and also where we anticipate prices to fall. This anticipation is best when we have a firm grasp on standard deviation. Standard deviation is a measure of the distribution of occurrences around the average. It is used to give us a reasonable expectation of prices ranges for a given time frame.
The guys explain how we can insert stock price, IV and time frame into a formula to find the expected move. They also show how the market often overstates implied volatility. The overstatement suggests that one standard deviation strikes are usually further out than where the prices eventually land. Be sure to go through the video for some compelling visuals to better understand these concepts.
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