I figure if you're making money, then you're a good options trader. And if you're learning stuff at the same time that is also improving your results, then you're not only a good options trader, you are an evolving and improving options trader.
Great larger post by the way - the conversation you've kicked off is (MHO) GREAT!
I really like this!
Looks like a good roadmap for new people to consider following as they get started (clearly of the NOT-ADVICE sort). This looks Options Glossary thread quality material - I'm going to add it (or ping me if you'd rather it not be there).
My experience has mostly been in agreement with the idea that 2% weekly returns are reasonable. The risks and stuff I would add:
- While 2%/week might be reasonable / doable, I would NOT incorporate that 2% weekly result into decision making regarding strikes and positions. The strikes and positions are whatever they are based on how you choose those strikes, and the %/week is a side effect. There will be times in the market where the strikes you like yield >2%, and there will be times when they are <1%.
- Therefore if the 2%/week IS a criteria for strike selection, I would put that into the additional risk category
- To hit 2%/week, my own math is to be opening 3% positions and closing them at 2/3rds. If I'm opening 2% positions and closing at 2/3rds then I'm really only earning 1.3%/week (oh no).
The question about the options market drying up is a really good one. I do believe that it is inevitable, though whether that is 2025, 2030, or 2050 is opaque to me
. Something I did awhile back is to go find another highly liquid options market (I chose Apple; QQQ or SPY are good other candidates) and setup some test trades that you like and see what they look like.
This works especially well with an individual company that you know well and that has a big options market. I don't know Apple but its the active market I could try out quickly. I figure that as long as there is a safe 0.5% return available (25%/year) then this is working really well.
Compounding is indeed available. Whether to include it or not gets into portfolio makeup and management. Thus my own approach - I don't include compounding in calculating my possible annual results, nor do I incorporate compounding into my week to week trades.
A made up example that is pretty consistent with my own trading pattern, and NOT-ADVICE.
Given $1M in cash to back put spreads with (lets assume a retirement account with no margin), then I can use that to back 50x $200 wide spreads. Which is in fact what I would do (or 33x $300 wide spreads). As the gains accumulate I start adding additional spreads with each week results, making those get bigger over time. But now I'm also exposed to "blow-up-the-account" risk when the shares move sharply against me (we've got multiple examples the last couple of months). As a % I have a position open right now that was (equivalent) $160 ITM on that made up $200 wide spread. Were I to close at that point and take the loss, then my $1M account is suddenly worth $200k.
The problem with compounding results is that this 80% loss is going to hit the original cash plus any additional earnings. Thus I don't include compounding in my results.
And I plan ahead for that 80% loss. I haven't eaten one yet, but since this is my retirement I'm risking and I think I'm nearly unemployable now, I want to prepare for the possibility
This is pretty close to my own distribution. I don't have it in a neat pie chart like this, but I'm around 1/5th overall in shares with most of those in a taxable account with a really low cost basis (tax considerations will matter deeply to change those into something else). Sidebar - the remaining shares are in an account where they could be liquidated, but I keep them for sentimental reasons, and to occasionally look at a position that is ahead 19,909% (cost basis 5.47 from 2012).
Ignoring the shares my portfolio is targeted to be 1/3rd cash for selling put spreads and 2/3rds share replacement leaps (dominant position are June 750s) that I use to sell covered calls -- at least when I can sell strikes at the break even or above. The intent is that if disaster strikes on the put spreads then I can sell off half of the calls and still have enough cash to continue selling put spreads at the same level as before the disaster.
Using your pie chart that would be the cash+ options slices for me.
Anyway the rest is "cash" which I've got divvied up 1/3rd in cash
Love this conversation
Love, love, love it.
Doable or not I also am aiming for that 2-3% range. My experience thus far is that hasn't been unreasonable for me. As an important cautionary note, that others have also identified (for anybody reading this for the first time), it wasn't doable for me when I started a couple of years ago. Its taken most of that time to get where I'm at now.
I also think of it, over the long haul, as open at 3-5%, and close at 2/3rds, keeping 2-3%.
