The figures I gave are for illustration purposes. I seem to recall our discussion earlier this month that referred to me buying 25 lots of NG way-out-of-the-money options for 1 tick and selling them when the underlying exceeds a whole handle above the strike. This would be a return of $250,000 for the $625 investment - a return of 400-1 rather than 100-1. The point I'm trying to make here is that if you can get higher odds than the actual chances of something happening, then that proposition represents a good bet.
Another example would be if you were to offer me a roulette game where I get odds of 100-1 should the next two spins be the same number then I'd sit at your wheel all day and stick small bets on that because the odds of it occuring even on a vegas wheel are 1 in 38 for a return of 100-1 - A very good risk/reward ratio. I'm going to come out ahead if I sit long enough at the wheel to iron out the variance.
Many of the general public seem to think the odds of getting the same number twice in a row at any point are actually 1444:1 against (vegas wheel), and that ignorance of the true odds is the edge of which I speak! the odds ARE the latter figure IF you had to pick the number that came up to start with, but that wasn't in the proposition was it?
At the other end of the scale, if you wanted to bet me money on picking a single number and I palmed you off with 20-1 odds, then I'd be taking your money all day in this example.
Mug punters who bet things like throwing craps (30-1 return for a 36-1 probability) are throwing their money away in the exact same way.
I believe the skill of the trader isn't so much about trying to predict the future direction of markets (which is what a large number of the public think "futures" trading actually involves!) but making and taking proposition punts from the rest of the crowd should you spot an edge that the other guy has not in the setup under view.
The obvious example of such a trade is the arbitrage trade.
Locals in the pits are closer to the market, and therefore get an edge on this kind of trade.
In a global age however, being right about an event can still make you wrong the market because the market is full of idiots pushing prices where they should not be going.
An example of this is the dot com stock market evaluations.
I believe this has happened today in Coffee, where I got a surpise fill at 23340 in the march contract for a sale at what was up around 900 on the day. I have no interest in "buying breakouts" but am quite happy to risk the "trying to catch the knife" in shorting coffee pretty much at the highest price it has been at for years on poor fundementals looking ahead for the coffee market.
I believe the speculating community is trying to make coffee the "next cotton". I believe the odds are stacked in my favour against people who might be buying this "breakout".
Sold 1 KCH11 @ 23340
(already Short 1 ZGG11 @ 13884)
Happy with it failing these past few days at gold re-acquiring 1390 let alone 1400!
(already short 1 ECH11 @ 13408)
Not so far ahead as to be "secure" yet, but comfortable nonetheless.
Outstanding orders not filled:-
Sell 1 ZSH11 @ 13736 GTC
I'm attempting to sell into a exhaustion spike here of course. I review the entry price being attempted on a day and week basis based on where the pivots move to, any new highs/lows made, and the like. The risk if I get filled is a lot lower for me than for anyone attempting to buy one on stop at the lofty price depicted, and that's where I take my edge from. If I am wrong, then being "wrong" mostly means not getting filled which of course costs me nothing at all! Being wrong and losing money involves me being filled, then being whiplashed by the market continuing to rally strongly beyond my price. Not likely in my book to rally that far. When was that last time beans held a 200+ point weekly rally, or even made that move come to that?
Hoping you catch my drift here. It might all seem a bit eccentric, but it has worked for me these past 6 years, and needs large moves just to get me into the market to start with!