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It’s very easy to be deceived by the percentage of profitable trades when analyzing the performance of options trading strategies. In this video, we’ll discuss why the percentage of winning trades does not mean anything unless you have two other vital pieces of information:
1. The average profits of winning trades
2. The average losses of losing trades
By analyzing the average profits and average losses, we can derive the “required success rate to break even” on that strategy. Only then can we determine whether an option strategy’s win rate is good or bad.
Of course, you can just calculate the average P/L of options strategies to compare them side-by-side, but this video helps explain where the outperformance of one strategy stems from (hint: it’s the realized success rate – the required breakeven success rate).
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