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 gain 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

 

Edited by Kim

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

  • Things To Think About Before Getting Involved In Investing

    There are various benefits associated with investing. It can be a great way to boost your income, providing you with financial security during a troubling time. Smart investing also comes with the possibility of long-term returns, meaning it can be better to invest your money than leave it in your regular bank account (even if you are earning interest). 

    By Kim,

    • 0 comments
    • 197 views
  • Micron Technology (MU) Earnings Report June 30, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade. Read on or watch the video overview here: https://youtu.be/IDgR3FzONnI.

    By ORATS_Matt,

    • 0 comments
    • 224 views
  • Does “Managing Winners” Add Value to Short Strangles?

    Some option educators suggest short strangles have historically benefited from actively managed exit strategies. A widely popularized approach is to enter S&P 500 strangles at 45 DTE and exit at 50% of the credit received or a 21 DTE time stop, whichever occurs first.

    By Jesse,

    • 2 comments
    • 4,702 views
  • NKE Earnings Report June 27, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade. Read on or watch the video overview here: https://youtu.be/2mtx2ja-VwQ.

    By ORATS_Matt,

    • 0 comments
    • 233 views
  • KBH Earnings Report June 22, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade.

    Read on or watch here:

    By ORATS_Matt,

    • 0 comments
    • 298 views
  • Know How To Trade Before Making An Investment

    Everyone is searching for a way to improve their living quality. Plenty of scopes are coming to the forefront and people are grabbing the opportunities with the hope of receiving the best revenue against their investment. A share market is a place that can return the high revenue of your investment.

    By Kim,

    • 0 comments
    • 321 views
  • Implied Volatility and Standard Deviation

    1. Isn't holding a naked long call (as a result of locking in a profit or plain buying outright call) in general a bad idea? Reason I think so is because of the nature of IV: it mostly falls when the underlying is rising. So you have short theta and a big long vega moving against you.

    By Mark Wolfinger,

    • 0 comments
    • 300 views
  • Introducing a "Risk Free" Trade

    A few weeks ago, I got the following email from one of our former members: "I would like to share with you an article about "projected no risk trades" or "no risk trades". Of course I was skeptical. But when he shared the setup with me, I became intrigued. How does the following risk profile look to you?

    By Kim,

    • 6 comments
    • 1,393 views
  • What You Trade Matters

    Traders love to tell people that they can trade anything. That if you have the skills to be a trader, the specific item traded is unimportant. That may be true for some professional traders who are skilled technicians. However, it’s very different for gullible amateurs.

    By Mark Wolfinger,

    • 0 comments
    • 633 views
  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 822 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 Expertido