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.

Why Winning Ratio Means Nothing


A lot of options traders consider 90% probability strategies a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not true, but in fact, winning ratio alone tells you NOTHING about your chances to be profitable. 

The winning ratio is simply the number of winning trades divided by the total number of trades. For example, a trader who won on 15 of 20 trades would have a 75% winning ratio.

90% winning ratio strategy in options usually refers to Out Of The Money credit spreads that have 90% probability to expire worthless. To achieve 90% probability, you have to sell credit spreads with short deltas around 10. 

 

Options Delta can be viewed as a percentage probability an option will wind up in-the-money at expiration. Looking at the Delta of a far-out-of-the-money option is a good indication of its likelihood of having value at expiration. An option with less than a .10 Delta (or less than 10% probability of being in-the-money) is not viewed as very likely to be in-the-money at any point and will need a strong move from the underlying to have value at expiration.

 

When you sell a credit spread with short deltas around 10, they have approximately 90% probability to expire worthless, so theoretically, you have a chance to have a 90% winning ratio.

 

Here is the problem: when you have a 90% probability trade, your risk/reward is terrible - usually around 1:9, meaning that you risk $9 to make $1. Also with 90% probability trades, your maximum loss is usually limited to 8-10%, but your loss can be 100%. That means that you can have 90% winning ratio, and still lose money. Also consider the fact that if you win 10% five times in a raw and then lose 50%, you are not back to even. You are down 25%.

 

 In the example image below, we can see that even with a 90% winning percentage, a trader can still lose money if they take losses that are too large relative to their winners:

winpercent1.png

 

It should be obvious by now that winning ratio alone doesn't tell the whole picture - in fact, it is pretty meaningless.

 

If you are not a member yet, you can join our forum discussions for answers to all your options questions.

 

Does it mean that credit spreads are a bad strategy? Not at all. But considering winning ratio alone to evaluate a strategy is not a smart thing to do.

 

On the other side of the spectrum are traders who completely dismiss credit spreads due to their terrible risk/reward ratio. Here is an extract from an article by popular options guru:

 

"The truth is that OTM Credit Spreads have a high probability of making a profit. The average Credit Spread trader will face 100% losses on this trade several times a year while trying to make a modest 5 to 10% a month. What happens is that eventually most Credit Spread Traders meet their doomsday. Sooner or later, virtually all option traders who use only OTM Credit Spreads wipe out their trading accounts.

 

Let’s look at the “Computer Glitch” of 2010 when the DOW dropped 1000 points in a matter of minutes. Those doing Credit Spreads on this day lost on average between 70% and 90% of their portfolio. What happened is that the volatility rose drastically and the trades moved into that “danger zone” where they lose 100% 10 percent of the time. The Credit Spread trader doesn’t realize that the 10 percent of the time they lose can happen AT ANY TIME. Most people think that they will have 9 wins followed by 1 loss, but this obviously is not how the law of probability works. It’s not uncommon for an OTM Credit Spread trader to face a catastrophic loss on their very first trade, and once this happens, there is no way to recover since a winning trade will only bring back 10% on the remaining capital."

 

This article ignores few important factors. It is true that credit spreads can experience catastrophic losses from time to time. But this is where position sizing comes into play. Personally, I would never place more than 15-20% of my options account into credit spreads - unless they are hedged with put debit spreads and/or puts. This is what we do in our Steady Condors portfolio.

 

Many professional traders consider 60% winning ratio excellent. Peter Brandt admits that his winning ratio is only 43% - yet his Audited annual ROR is 41.6%. Many strategies are designed to have few big winners and many small losers.

 

The bottom line: the only thing that matters in trading is your average return per trade, not the winning ratio.

 

Related articles:

 

Want to see how we handle risk?

 

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

  • IVolatility Tools: Advanced Options

    Perhaps the toughest part of trading options is figuring out what to do. For this we have advisors, seminars, newsletters and more. Yet, one tool that all investors need, but few utilize adequately, is data. This concept is parroted across the industry, but how does the average investor move from the desire to utilize data to the actual practice?

    By Levi Ioffe,

    • 2 comments
    • 430 views
  • A Global Equity Put Write Portfolio

    Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

    By Jesse,

    • 0 comments
    • 351 views
  • The Random Walk Hypothesis

    The “random walk hypothesis” (RWH) is one idea about how stock prices behave – but only one of many. It is a theory promoted in academia and believed in my many, but not so much by traders involved with handling real money. Theories aside, is the market truly random?

    By Michael C. Thomsett,

    • 0 comments
    • 369 views
  • How To Trade Options Successfully

    I’ve now been trading options for over a decade and been associated with Steady Options for seven years – hard to believe.  Over that period, I’ve learned quite a bit about option trading; how to improve, what not to do, and generally how the option markets work. I’m still learning.

    By cwelsh,

    • 3 comments
    • 688 views
  • January 2019 Performance Analysis

    No one likes losing money, and no one likes hearing "excuses". However, in an effort to be fully transparent, solicit feedback, and to improve our own performance, we're writing this article to do a further breakdown of the losses which our model portfolio incurred in January 2019. 

    By Kim,

    • 17 comments
    • 1,487 views
  • Island Clusters as Strong Reversals

    Options traders constantly seek the elusive reliable reversal signal. A few unusual but strong reversals are worth looking for, and their patterns reveal likely exceptional timing for opening or closing option trades. One example of this exceptionally strong signal is the island cluster (or, island reversal).

    By Michael C. Thomsett,

    • 0 comments
    • 445 views
  • What’s Wrong With Your 401(k)? (If anything)

    There currently are over sixty million Americans that are active 401(k) participants, and well over 500,000 total active 401(k) plans offered by employers in the United States.  Despite these high numbers, usages could be higher, as the US Census Bureau estimates that only 41% of all employees with access to a 401(k) plan utilize it, with even less funding it fully.

    By cwelsh,

    • 0 comments
    • 528 views
  • Upcoming Decay of Options

    I am on the hunt for a short volatility position for three main reasons. First, the market’s wild swings have, for the time being at least, diminished. Second, option activity has dried up as my options barometer continues to be stuck in the 4 – 6 range as traders are not making big bets in either direction.

    By Jacob Mintz,

    • 0 comments
    • 628 views
  • The Scientific Process of Increasing Expected Returns

    For many US investors, the "base case" for equity investing is US large cap stocks, most commonly benchmarked as the S&P 500. You could absolutely do far worse than owning these 500 great US companies, and the weight of the evidence suggests that most actively managed mutual funds that benchmark themselves against the S&P 500 index have in fact done worse.

    By Jesse,

    • 0 comments
    • 1,083 views
  • Those Golden and Death Crosses

    The use of moving average (MA) for predicting future price behavior must be undertaken cautiously. MA is a lagging indicator, so the question must be: Can a lagging indicator provide guidance for the future? Yes. The use of two MA lines and how they interact is a reliable form of reversal indicator.

    By Michael C. Thomsett,

    • 0 comments
    • 733 views

  Report Article

We want to hear from you!


There are no comments to display.



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