﻿ How to bet properly! – Investment Watch
﻿

# How to bet properly!

Sharing is Caring!

by x3lr4

I see a lot of people just YOLO’ing their life savings on the next meme stock here. Yes, it’s more fun than buying a lottery ticket and your chances of success are higher. Wait, are they?

As a physicist and mathematician, I feel the need to at least tell my fellow autists how to bet properly.

There’s something called the Kelly criterion, which tells you whether a bet is favorable or not. I’m not boring you with the details, so just read the article if you’re smart. But at its core it’s a really simple formula:

``````f* = p - q/b
``````

, where f* is the Kelly criterion, p is the probability of success, q is the probability of going tits up and b is the profit-risk-ratio.

Trading software like TWS and many others give you the probability of success, based on a lognormal distribution, when you create an order. So p and q are known. f* needs to be positive, the bigger the better. b is what we want to know.

Here’s an example:

``````p - q/b > 0
p > q/b
b > q/p
b > (1-p)/p , because q = 1-p
b > 1/p - 1
``````

I wrote out every step, so even the biggest idiot can understand it. So if your probability of success is 70%, your profit-risk-ratio needs to be `1/70% - 1 = 42.9%`. That means if you risk \$100, you need to potentially earn at least \$43.

But those numbers are only interesting for the theta gang and them losers in r/investing.

My strong handed r/wallstreetbets friends, with balls made out of steel, need an example that better suits their need for the ultimate thrill.

So let’s say you buy a call that is 20% OTM at 280% IV. For example a Feb’28 40c on \$SPCE. The underlying is currently at \$33 and the call costs \$3.50.

This will give you a 27% chance of success, so the profit-risk-ratio needs to be `1/27% - 1 = 270%`. If you exit these trades at less profit than an average 270% on your investment, math clearly states that you’ll definitely go tits up.

If you bought this Feb’28 40c on \$SPCE for \$350, you need to sell it for at least \$1,297 (on average over all your trades). It’s even a bit more, because of commissions.

Now listen, this is the optimal way of betting, but there’s still a risk of going bankrupt. If you do an evolution on the Kelly bet, more than 75% of them diverge (go to infinity), but almost 25% still converge (go tits up). So people like Warren Buffet only do 20%-50% of the Kelly criterium.

I hope you retards actually learned something.

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.

133 views

This site uses Akismet to reduce spam. Learn how your comment data is processed.