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THE SECRET SIDE

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OF TRADING
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the trading strategy you can use
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to put the odds on your side!
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. . . . . . . . to
I’ve been trading for over 25 years because I love it. It’s endlessly fascinating . . . . . . . . . and
.............................................................................
. . . . . . . . . . . .me,
. . . . . . . . . . .it. . lets
.....................................................................
..............................................................................................
. . .
me provide for my family and live a very comfortable life. Despite its complexity,. . . . . . . . . . . . . . . . . . . . . . .....................................................................
. . . . . . . . . . . . .I’ve
. . . . . found
............................................................................
one thing has been consistent throughout all my trades. And while it’s not . . . . . . . . . . . . . . . . . . . . . . . . . .....................................................................
. . . . .necessarily
. . . . . . . . . . . . . . .a. . secret,
........................................................................
it’s not something that Wall Street would have told you. . . . . . . . . . . . . . . . . . . . . . . . . . .....................................................................

If you’ve been learning about trading the “traditional” way – buying mutual funds, stocks, bonds,
studying balance sheets, listening to financial ‘experts’ on TV, etc. – it’s not your fault that you’re
not employing a more powerful approach. There has never truly been a set of mechanics that,
when stuck to, equated to successful trading.

Given the democratization of information and technology, there has never been a better time to
take hold of your financial future. It doesn’t require a high IQ or a finance degree (believe it or not,
my degree was in Latin). You don’t even need to quit your job. All it requires is engagement,
patience, and a thirst for financial freedom.

Are you ready?

Tom Preston
Chief Content Officer and Quantitative Strategist
Trader, 25+ Years

02
IT’S TIME YOU TAKE A
NEW APPROACH
Let me guess why you’re reading this. Maybe you’re just start-
ing out trading and want to avoid some of the biggest mistakes
most traders make. Maybe you’ve been trading a while, but your
profits aren’t quite meeting your expectations. You’ve read ar-
ticles and books, listened to “market experts”, and done some
research. But something’s missing that’s keeping you from be-
coming a consistently successful trader...we’re here to clear
away the smoke and help you simplify your approach.
age your health with probabilities. Don’t smoke? Avoid sugar? Do
some cardio? There are individuals who smoke, eat sugar with
abandon and who barely get off the couch who live long lives. But
you have a higher probability of a long life if you don’t.
So, if you manage most aspects of your life based on their prob-
ability of success/failure, why aren’t you doing that with your in-
vestments?

YOU USE THE SECRET TO Would you bring an umbrella at 7am? At 5pm?

TRADING
7AM 9AM 11AM 1PM 3PM 5PM 7PM 9PM

SUCCESS 22% 32% 38% 53% 75% 89% 88% 32%

IN YOUR EVERYDAY LIFE.

When you go for a walk outside without an umbrella, you are es-
timating the probability that it will or won’t rain. When you hop
in your car and go to the store, there are usually several differ-
ent routes you could take. But you choose the one that has the
highest probability of getting you there fastest. You even man-

03
ASK YOURSELF
WHO MAKES MORE YOUR ODDS OF BEATING THE CASINO
MONEY, A CASINO BACCARAT 35.9 - 48.8%
OR ITS GUESTS? BLACK JACK 30-50 %
Normal 30-40%
Perfect Strategy 48-48.5%
We all know that casinos have the edge, it’s the only way they Strict Card Counting 48-50%
are able to stay in business. Take a look at the chart to the
right and you can see that the house always has the advan- CRAPS 33.3 - 49.4%
tage, regardless of the game. Normal 33.3-48.6%
.............................................................................................
..............................................................................................
.............................................................................................. Normal Odds 49.2%
..............................................................................................
. . . . . . . . Probabilities
How? . . . . . . . . . . . . . . . . . . . . . course.
. . . . . . . . . . . . . . . . . . though
. . . . . . . . . . . . . . . . . . .gamblers
............................
. . . . . . . . . . . . . . . . . . . . . . . . . of
. . . . . . . . . . . . . . .Even
. . . . . . . . . . . . . . . . . .some
.................................... Double Odds 44.4%
..............................................................................................
.
win. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Over
......................
. . . . .big,
. . . . .the
. . . . .casinos
. . . . . . . . . .let
. . . .the
. . . . law
. . . . . of
. . . large
. . . . . . . numbers
. . . . . . . . . . . . play
. . . . . . out.
............................
..............................................................................................
..............................................................................................
time,
. . . . . . . many
. . . . . . . . people
. . . . . . . . . . will
. . . . . play
. . . . . . the
. . . . . .various
. . . . . . . . . .games
. . . . . . . . . and
. . . . . . as
. . . . more
....................... KENO 20.5%
..............................................................................................
..............................................................................................
people
. . . . . . . . .play
. . . . . .each
. . . . . . game,
. . . . . . . . .the
. . . . .number
. . . . . . . . . . of
. . . favorable
..............................................................................................
. . . . . . . . . . . . .outcomes
. . . . . . . . . . . . . for
....................
..............................................................................................
the ROULETTE 44.7 %
. . . . .casino
. . . . . . . . . will
. . . . . converge
. . . . . . . . . . . . . on
. . . . the
. . . . . expected
. . . . . . . . . . . . . ratio
. . . . . . .of
. . . outcomes,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................
..............................
..............................................................................................
and
. . . . . those
. . . . . . . . . . . . . favor
. . . . . . . . . . . . . . . the
. . . . . . . . . . . . casino
. . . . . . . . . . . . . . over
. . . . . . . . . . . . . . . .time.
. . . . . . . . . . . . . .You
. . . . . . . . . . . . .will
. . . . . . . . . . never
. . . . . . . . . . . . find
. . . . . . . . . . . . . .casi-
......................
............................
..............................................................................................
nos
. . . . . leaving
. . . . .
. . . . . . . . . .their
. . . . . . . . . .
. . . . . . ability
. . . . . .
. . . . . . . . .to
. . . . . . . . .
. . . make
. . .
. . . . . . . .a. . profit
. . . . . . . . . .
. . . . . . . .up
. . . . . . . .
. . . .to
. . . .
. . . chance.
. . . . . . . . . . . . . . . . . ......................
.................................... SLOT MACHINES 15-48%
..............................................................................................
..............................................................................................
..............................................................................................
..............................................................................................
.............................................................................................. FOOTBALL / BASKETBALL 18.7-40%
..............................................................................................
..............................................................................................
..............................................................................................
.............................................................................................. Single Bets 40%
..............................................................................................
..............................................................................................
.............................................................................................. Two-Bet Parlays 37.5%
..............................................................................................
..............................................................................................
.............................................................................................. Three-Bet Parlays 18.7%
..............................................................................................
..............................................................................................
..............................................................................................
..............................................................................................
.............................................................................................. HORSE RACING 31%
..............................................................................................
..............................................................................................
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..............................................................................................
..............................................................................................

04
BECOMING THE
CASINO
Most people think about trading stocks as buying low and selling
high and that’s great . . . if you can do it. Most people, including
me, can’t. Why? Look at the chart below. Picking the right direc-
tion is pretty close to a 50/50 bet. The only way to profit from
this behavior without leaving it to randomness is through stock
options. They allow you to control your probability of profit, es-
sentially making you the casino.
Trading options isn’t so much about whether the stock will go
up or down, but that it probably won’t go up or down more than
some amount. As you can see below, stocks usually won’t move
consistently in one direction for a long time. Additionally, options
lose all their value at their expiration date. If you sell those op-
tions like casinos sell bets, you’re more likely to profit like the
casinos do.

SPX DOWN DAYS SPX UP DAYS

4,000

3,500
Number of Occurrences

3,000

2,500

2,000

1,500

1,000

500

0
12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Consecutive Daily Moves

05
 THE TRILLION DOLLAR
INDUSTRY BUILT ON
PROBABILITIES
There’s another type of industry that has perfected this model, In a simple example, if there was a 1% chance you’d make a
and it generates trillions of dollars each year. $100,000 claim this year, the value of that claim would be $1,000.

Why do insurance companies exist? It’s not because they are

1 X =
charitable organizations who just want to protect you and your
property in the unlikely event that something happens, is it? No, %
they do it because it’s a very lucrative business to be in. $
100K $
1,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . How
. . . . . . . . . . . . . . do
. . . . . . . . .these
. . . . . . . . . .behemoths
. . . . . . . . . . . . . . . . . of
. . . . . . . . . . . . . . industry
. . . . . . . . . . . .maintain
. . . . . . . . . . . . . . . . . .their
. . . . . . . . . . . . . . edge?
. . . . . . . . . . . .You
. . . . . . . . . . . . . . . . . . . . . . .
. . . Claim
. . . . . . . Chance Policy Coverage Actual Policy Value
. . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . guessed
. . . . . . . . . it,
. . .probabilities
. . . . . . . . . . . . .and
. . . .risk
. . . . management.
. . . . . . . . . . . . . . They
. . . . . .know
. . . . . that
. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . most
. . . . . . . . . . . . . . . houses
. . . . . . . . . . . . . .don’t
. . . . . . . . . . . . . .burn
. . . . . . . . . . .down.
. . . . . . . . . . . They
. . . . . . . . . . . .make
. . . . . . . . . . . . a. .solid
. . . . . . . . . . . . . profit
. . . . . . . . . . . selling
. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . overpriced
. . . . . . . . . . . policies
. . . . . . . . since
. . . . . .most
. . . . . people
. . . . . . . will
. . . .never
. . . . . .make
. . . . . .big
. . . claims . The
. . . . . .insurance company may then charge a $2,500 premium.
. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . on
. . . their
. . . . . insurance
. . . . . . . . . . policies.
. . . . . . . . Their
. . . . . .sales
. . . . .exceed
. . . . . . . their
. . . . . risk
. . . .over
. . . . time.
. . . . . . . . . . . That
. . . . . extra
. $1,500 is the profit that the insurance company ex-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. pects
. . . . . . . to make over time when you buy the insurance policy to
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . The
. . . . . . . . . . . . . .important
. . . . . . . . . . . . . . . thing
. . . . . . . . . . . . . . . .to
. . . . . . . . .realize
. . . . . . . . . .is
. . . . . . . . . that
. . . . . . .insurance
. . . . . . . . . . . . . . .companies
. . . . . . . . . . . . . . . . . . . . . are
. protect
. . . . . . . yourself
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . selling
. . . . . . . you
. . . . an
. . . overpriced
. . . . . . . . . . .policy.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,500
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

=
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
.
.
.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2,500
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1,000
$
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual Policy Value
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium
. . . . Paid Company Profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. You
. . . . . now have two key insights: the strength of probability and
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . .importance
. . of becoming the seller. How do you make that
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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work for you when trading stock options?

06
INTRODUCING THE
BELL CURVE
A bell curve is used to describe the normal distribution of data.
It is broken down into 6 sections. Each section represents the
probability of that outcome. The very middle of the bell curve is
the mean, or average of all of the outcomes for the given sample
set.
You can easily see this represented in the grades students re-
ceive in school. Most kids receive a C, a few less receive a B or a
D, and fewer still receive an A or an F.
If you went into just about any classroom in the world and had to
guess what grade a student would get, you’d guess C because,
without knowing anything else about a them, you’d know that’s
the grade they’d have the highest probability of getting.

STANDARD BELL CURVE

C

D B

34.1 % 34.1 %
F 13.6 % 13.6 % A
2% 2%

07
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MOVING OUTSIDE
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THE MEAN
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When we move outside of the mean this is called deviation. A If you were to extend further to two standard deviations, you’d
standard deviation extends 34.1% in each direction. In the grade include the students who will receive either a B or a D. That ac-
example, that means 68.2% of all students are expected to earn counts for 95.4% of all students.
a C.

1 STANDARD DEVIATION 2 STANDARD DEVIATIONS

- C + - C +
D B D B

34.1% 34.1% 13.6% 34.1% 34.1% 13.6%

F A F A
68.2% 95.4%

68.2% Stock price movement is similarly distributed, and understand-

ing that is powerful. More powerful than expert opinions, more
OF ALL STUDENTS FALL powerful than analysis reports, even more powerful than insider
information. Even if you knew everything possible about a com-
WITHIN ONE STANDARD pany, it is more valuable to know that its price will usually stick to
DEVIATION OF THE MEAN a bell curve.

08
STOCK BEHAVIOR
ACROSS THE
BELL CURVE
As we said before, it’s not typical for a stock’s price to change We know that a stock has a 68% chance of falling within a 1 stan-
dramatically within the short period of time of 1 to 2 months. Of dard deviation move and a 95% chance of falling within a 2 stan-
course they move up and down, but they also typically stay within dard deviations over a given timeframe.
a given range. Because of that, we can actually use the bell curve
to anticipate a range for the price movement of a stock.

THE LIKELIHOOD
OF PRICE MOVEMENT
34.1 % 34.1 %

68.2 %

13.6 % 13.6 %
95.4 %

CURRENT PRICE
3 SD 2 SD 1 SD 1 SD 2 SD 3 SD

Standard deviation ranges are determined by two variables that

also form the cornerstone of how options are priced: volatility
and time.

09
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VOLATILITY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AFFECTS STANDARD
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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DEVIATION
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . STOCK
. . . . . XYZ
. . . . . . . . . . . . . . . . . . . . . . . . . . . .%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implied volatility, or IV, measures the potential magnitude of a 95.4
potential price change: how far and how fast it might move within IV: 20 %
68.2%
a given timeframe. It’s often seen as an indicator of fear or un-
certainty in the market. The higher implied volatility is, the wider
the expected range of a stock’s movement becomes. This also
widens standard deviation on the bell curve.

We mentioned a $100 dollar stock earlier and said that its price 60
$
80
$ $
100 $
120 $
140
was unlikely to move in an extreme direction over a month or two.
Now let’s look at how far we could expect it to move in two differ- If that same Stock XYZ is still trading at $100, but now with 20%
ent IV environments. IV, we can expect that 68.2% of all its price movement will land
somewhere between $80 and $120. At two standard deviations,
STOCK XYZ
we see the price range open up to between $60 and $140. The
95.4%
IV: 5 %
68.2%
total distance for two standard deviations is now $80, not $20.

Time actually impacts the bell curve in a similar way. The fur-
ther we go out in time, the wider the range of expected prices
becomes.

By gauging time and volatility, we can more accurately predict

$
90 95 $100 $105 $110
$
how much a stock might move within a given timeframe. That
doesn’t actually do us much good if we’re only looking to trade
If Stock XYZ is trading at $100 with only 5% IV, we can expect stock because it has no natural expiration. Options do though,
that 68.2% of all its price movement will land somewhere be- and that’s a huge edge for predicting price movements. We can
tween $95 and $105. Widened out to two standard deviations, choose options that expire sooner or expire later, and we can also
we see that 95.4% of all those prices land between $90 and $110. select the options we’re trading based on the amount of implied
The total distance for two standard deviations is $20. volatility they currently have.

10
YOU CAN STRATEGIZE
The important thing is that you are trying to make your own prof-
its the same way they do - by leveraging time, probabilities, and

THIS WAY WITH ANY

overpriced agreements. That tends to be more profitable than
relying on Wall St.’s 50/50 bets.

ACCOUNT SIZE
So we want to use probability to profit like casinos and insurance
companies, but they have billions of dollars to work with. I don’t,
and you probably don’t either, and that’s ok. You can still use this
type of strategy with as little as a couple thousand dollars.
LESS TIME,
Insurance companies don’t risk it all on just one policy.They sell
millions of policies to nearly every adult. Casinos don’t risk it all
on one big gambler. They sell millions of bets to many gamblers.
Both insurance companies and casinos try to make a small profit
many, many times.
That’s the way we do it too. We don’t expect to make all our prof-
its on one big trade. Rather than focusing on immediate profits,
one or our goals is activity: placing small, high probability trades
with a certain frequency. This isn’t “churning” or “scalping” with
a lot of 50/50 guesses. What we do is diversify through large
numbers. The larger the number of small trades we do, the more
probability we have to make money.

MORE OCCURRENCES
100 %
95 %
90 %
85 %
80%
75 %
70 %
W I N R AT E %

65 %
60 %
55 %
0 100 200 300 400 500
NUMBER OF OCCURENCES
Maximizing the number of occurrences improves trade success and consistency.

11
 LEARNING
TRADE OFTEN

fortune while still paying out jackpots.

firms so much to manage your money for you.

THE WALL STREET MACHINE

HOW TO USE
TRADE SMALL

IS A WAY FOR YOU TO ESCAPE

complex strategies specifically designed to manage our risk.

OPTION STRATEGIES
out for disasters, and casinos do it so that they can make their
a situation that better prepares us for extreme moves. Insurance
companies do this so that they can still profit even after paying
Since we place a higher number of smaller trades, we can create
easily than stocks do. They naturally have higher leverage, and so
scary options are. They don’t want you to understand them or
Financial advisors do a great job telling you how dangerous and

we can use our capital more efficiently. We can also create more
Options let us define how much risk we want to take much more
make money with them. If you did, you wouldn’t need to pay the

12
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research, click here to check
If you’re ready to dive into our
up-sell. In exchange, all I ask is that you try this probability-based
To put this into action, you need to learn some specifics about

will tell you exactly what you need to know to start making money
strategies and concepts. We’ve put together some videos that

approach and see if it transforms your investing approach and

You can find them on tastytrade.com, and you can probably
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