SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Should You Aim for 100% Gains?


Options can be risky, even very risky, but they don't have to be. There are a lot of myths and misconceptions about options trading. Here is one of them: you should aim for at least 100% gain in each option trade, otherwise it is not worth the risk. Is it true?

 

Here are some questions you should ask:

  1. In order to make the 100%, how much do you risk?
  2. How much of your capital do you allocate for those positions?
  3. How much time do you give the trade to develop?

 

The first two questions are directly related to position sizing.

 

Consider the 2% rule described in Dr. Alexander Elder's excellent book "Come Into My Trading Room". The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.

 

If you adapt the 2% rule and the risk in your trade is 50%, then you can allocate 4% of your account for that trade. If your risk is only 20%, then you can allocate 10% to that trade.

 

So here is another question:

 

Which one is better - one 100% winner which risked 50% and took one week to achieve or seven 10% winners which risked 20% and took one day each?

 

If you followed the 2% rule and allocated 4% of your account to the first trade, it contributed 4% to your account. But you could allocate 10% to each of the seven 10% winners, so they contributed a full 7% to your account during the same week.

 

myths.jpg

 

Our trading strategy is based on consistent and steady gains with holding period of few days to few weeks. Those are not Home Runs, but most of our trades had very low risk, hence you could allocate 10-15% of your account to each trade. Make ten such trades each month with average return of 10% per trade, and your account is up 10% per month.

 

Here are some conclusions:

  • There is more than one way to trade options.
  • Position sizing is one of the most important elements of trading, especially options trading.
  • Few small winners achieved with low risk might be better that one big winner achieved with higher risk.

What is really important is not an occasional 500% winner, but an overall trading plan. What really matters is the return on the overall account. Next time someone tells you how he made 500% in an options trade, please ask him the following questions:

  • How many trades you make every month on average?
  • How much do you allocate per trade?
  • How much do you risk per trade?
  • How many trades do you have open on any given time?
  • What is the average duration of the trades?
  • What is your winning ratio and average return per trade?
  • What is an average monthly return on the whole account using your strategy?

If you learn to ask the right questions, you can avoid the hype and properly evaluate an options strategy in context of the overall portfolio return.

 

Want to learn more?

 

Start Your Free Trial

 

 

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Options: Debt and Net Return

    This is the last in a series of articles about how dividends affect option value and volatility. In picking stocks for options trading, what are your criteria? Analysis of dividends, debt and net return – all fundamental tests – help identify strong value companies (and lower-volatility options) versus weak, high-risk stocks.

    By Michael C. Thomsett,

    • 0 comments
    • 166 views
  • Can you "Time" the Steady Momentum PutWrite Strategy?

    As a financial advisor, investment advisor, hedge fund manager, model developer, and newsletter signal provider for over a decade now, I've had the opportunity to see quite a bit of human nature in action.

    By Jesse,

    • 0 comments
    • 200 views
  • How Steady Momentum Captures Multiple Risk Premiums

    Our Steady Momentum PutWrite strategy attempts to outperform the CBOE PUT index, which writes cash secured puts on the S&P 500. An investable version of this strategy can be purchased with the ETF PUTW. The historical data for PUT extends back more than 30 years, highlighting how writing puts can be an attractive strategy.

    By Jesse,

    • 0 comments
    • 438 views
  • The Effect of Dividends on Options Pricing

    The theory of dividends and underlying stock prices is simple: The underlying price is expected to decline on ex-dividend date, by the amount of the dividend. As a result, option prices should decline as well. Under this theory, calls for higher dividend stocks should be valued lower and puts should be valued higher.

    By Michael C. Thomsett,

    • 0 comments
    • 313 views
  • 5 Ways To Identify Fake Forex Broker Reviews

    Many traders or future traders shop for a broker to work with and find endless reviews on the web, and not all are genuine. Here are 5 ways ways to separate the good from the bad. There are lots of sites that specialize in forex broker reviews and lots of talk about brokers in various forums.

    By Kim,

    • 0 comments
    • 180 views
  • 3 Dividend traps to Watch For

    Dividends are almost universally viewed as positive aspects of stock selection and options trading. The higher the dividend yield, the more positive. But does this ignore some dangers in dividend trends? In fact, there are three ways in which dividends can mislead traders and create positive impressions when in fact, the news is negative.

    By Michael C. Thomsett,

    • 0 comments
    • 248 views
  • Dividends and Options

    Steady Options has received numerous inquires into how dividends impact options, option prices, and the owners or option contracts. The impact of dividends should be understood by any option contract trader.  Fortunately, the rules for option contracts and dividends are clear and straightforward. 

    By cwelsh,

    • 0 comments
    • 283 views
  • When Can You “Trust” a Backtest?

    There's a joke in the financial industry that "nobody has ever seen a bad backtest". There certainly are bad ones, but nobody ever markets them. They just get thrown in the trash. Even academics can fall prey to this.

    By Jesse,

    • 0 comments
    • 230 views
  • Increasing Yield Through Covered Calls

    When starting out with options, a natural place to begin is with covered calls. It’s a very easy to understand strategy for those that are familiar with stock ownership. The strategy involves buying a stock in lots of 100 shares. The total size will depend on you account size and how much exposure you want to take.

    By GavinMcMaster,

    • 0 comments
    • 326 views
  • Alternative Investments: Real Estate Construction

    One of the most common complaints received from investors relates to low yields, low returns and/or the inability to have a reasonable cash flow from investments. This is particularly true for investors who feel that they have too much invested in the stock market.  Many want to diversify into real estate of one form or another.

    By cwelsh,

    • 0 comments
    • 214 views

  Report Article

We want to hear from you!


Unfortunately, as much as I hate to say this, because I am , by far, a "net" option seller.

Assuming you are experienced, and know what you are doing, and , most important of all, you are only holding the option for around 1-2 days , or less...typically less than 1 day, long options can very often make 100%, 200% or more returns VERY quickly.

But it is a very tenuous thing. You have to be extremely disciplined, and, as I said, be in the position for a VERY short amount of time to avoid any time decay, just using the leverage of options to your advantage.

Yes, a $1.00 option can easily go to $2.00 within a normal intra-day move.

But, as a "go to" method for trading, I would highly recommend against it.

"Kid's, don't try this at home".

Do it very rarely and if/when it works, DO NOT allow it to get you to start thinking that this might just be a great, new path to go down.

Again, as much as I hate to say it, I have made more money , on the rare times that I have done this than all losses combined.

But, I almost never do it. It is not a viable trading methodology over the long run because what it is based on is not something that is mathematically reliable.

There are times when it is a good thing to do but, it does take many years of experience to know when it is one of those times.

It is like the legendary quote from Supreme Court Justice Potter Stewart in 1964..."I can't define it but, I know what it is when I see it!"

There are certain things that , after decades of observing the market, you just know. These are among the rare things that cannot be backtested because of the quote ("I can't define it...").

If you can't define it, you can't backtest it.

Share this comment


Link to comment
Share on other sites

Well, this is exactly my point. Can you sometimes make 100%, 200% or more on a single trade? Sure. But since those returns also come with much higher risk, your position sizing must be very small. You cannot build a strategy around those trades. Small part of your portfolio? Sure. Those must be considered speculative trades, unlike those consistent and proven strategies we are using at SteadyOptions. 

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs