A Basic Example On Gambling, And How It Relates To Options

From what we've seen, the majority of retail traders, and even the tv anchors and guests, all approach option trading from a different point of view than we do.  They mostly do their analysis of which direction they think a stock will go, and then they create an option strategy around that.  While that is a perfectly reasonable strategy, it is something we almost never do.  We approach our trading from a purely gambling perspective and usually have no opinion whatsoever on the direction of the stock.  In fact, a good portion of the trades we make are in stocks that we have no idea what the company even does, and some of them we don't even know the name of the company.

Let's start with a very basic gambling example (no intricate math here), and then we'll relate it to option trading.  Consider a game played with 1 die.  If you roll a 6 then you win $10, if you roll a 1,2,3,4, or 5 then you lose $1.  Sounds like a great game for you, right?  1 out of 6 times you win $10, and 5 times out of 6 you lose $1.  So on average, every 6 rolls you make $5 (your $10 win minus five $1 losses).  You make about 83 cents a roll (on average).  I'd play this game all day every day if I could.
One important thing to note, however, is that on each individual roll you are expected to lose.  A 6 is much less common than a 1,2,3,4, or 5.  But the big win on those occasions where you get your 6 makes up for the more common losses.  That is how we look at trading options (and life, for that matter).

For our option trading, all we are concerned with is getting to buy something for less than it is worth (or sell for more than it is worth).  In our gambling example, anything less than 83 cents is a price we would definitely pay to roll.  Any price over 83 cents and we'll pass and move on to something else.  So for options,  if we see something offered at 25 cents and we think its worth 31 cents then we'll buy them.  And we won't care what the company does, or what some chart says.  All we care about is buying for less than fair value.
Remember, just like before, each buy of out-of-the-money options is one you are probably going to lose to. And also just like before, the profit on the times you win will outweigh your more common losses.  If you are winning every bet you make, that means that you are only betting on the sure things, and you are simply not betting often enough.

Unfortunately, especially for retail traders, while our dice game is very simple to find the fair value of, options are not.

Feel free to leave any questions in the comments section.  We'll try to answer anything you ask.

P.S. One thing that really drives us crazy are all the options "professionals" seen on tv who almost never recommend an option or a spread because it was offered too cheap, or it was bid too high.  Are they not concerned with price?  Does the implied volatility not matter to them at all?  All we ever hear from them is why they think the stock will move in a certain direction, and that is why they made the trade.  They're more like analysts who trade options than professional option traders.