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

  • The Gut Strangle

    The graphically named “gut strangle” is a seldom-used strategy, but it might work in some circumstances. This involves trading in-the-money calls and puts. A long gut strangle is set up by buying both options; and a short gut strangle calls for selling both sides.

    By Michael C. Thomsett,

    • 18 comments
    • 379 views
  • Selling Options When Implied Volatility is High

    In the second week of October 2018, the Dow Industrial Average tumbled 1,300 points within a two-day period just ahead of earnings season. How did it happen? There were several explanations for why stock prices sold off, but the most obvious was that investor fear had changed market sentiment.

    By Nathan Wade,

    • 1 comment
    • 149 views
  • Do all stocks have the same expected returns?

    When deciding to build a diversified investment portfolio, there are many different considerations. Which asset classes do you buy? Large cap or small cap? US only, or international too? Mutual funds or ETFs? How much in bonds? Passive or active? Growth or value?

    By Jesse,

    • 0 comments
    • 199 views
  • Selling Puts: The Good, The Bad And The Ugly

    Hardly a day goes by that I don't read an article or hear some pundit extol the merits of selling puts (put-write).This article will discuss various variations of put-write strategies. What accounts for put-write strategies under-performance? How to fix put-write underperformance? Why "easy money" isn't so easy.

    By Reel Ken,

    • 0 comments
    • 378 views
  • The “OOPS signal” trade

    Have you been taken by surprise by movement of your stock? Options traders who find themselves on the wrong side of a trade have experienced this dilemma, but as often as not, it occurs as part of a move and retracement.

     

    By Michael C. Thomsett,

    • 0 comments
    • 413 views
  • 14 Tips to Better Trading from Home

    Here are 14 actionable ideas that will help you improve your trading from home. Implementing these ideas will help aspiring traders move toward the consistent profitability they seek.

    By TFCAB,

    • 0 comments
    • 7,137 views
  • Powerful Channel Signal – Combining Bollinger and T-line

    Technicians tend to focus on single indicators, such as Bollinger Bands or the t-line. These are used to attempt to perfect a timing system. Individually, each signal has merit. Combined, the reversal signal is exceptionally strong.

    By Michael C. Thomsett,

    • 0 comments
    • 6,784 views
  • Following Signs That Others Ignore (VIX Study)

    In fact, the crowd sees hardly anything out there that might end this market party.” Michael Santoli made the above statement during CNBC’s closing market wrap on January 26th, 2018. He had reason to throw caution to the wind as the S&P 500 closed the day up by more than 1%, setting another record high.

    By Michael Lebowitz,

    • 0 comments
    • 489 views
  • Revisiting Anchor Part 2

    Last month we posted some updates to the Anchor strategy that were obtained using an in-depth back testing of the strategy and variations of it using the ORATS Wheel software.  We adopted three conclusions last month:

    By cwelsh,

    • 4 comments
    • 508 views
  • Covered Calls –Does Rolling Forward Mean Higher Risk?

    Do you roll forward to avoid exercise? It seems like an obviously advantageous move. You avoid exercise and generate a net credit. What can go wrong? Actually, rolling incurs more risk, and every covered call writer needs to study the potential roll and compare the advantages of rolling versus closing and taking a loss or allowing exercise.

    By Michael C. Thomsett,

    • 0 comments
    • 652 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs