SteadyOptions Performance Dissected

[Kim 7,943]

We are asked many times how SteadyOptions performance is calculated. The purpose of this article is to clarify few basic terms and explain how we calculate and present our performance.

 

ROI (Return On Investment) vs. Portfolio Return

 

First, lets explain the difference between ROI (Return On Investment) and Portfolio Return. 

 

Lets take as example a month where we had 20 trades with average return of 5% per trade (this example is not far from our average performance).

Lets also assume that we have a $10,000 portfolio, allocate 10% ($1,000) per trade and have maximum of 6 open trades.

 

The total return for that month would be $50 (return per trade) * 20 (number of trades) = $1,000. Since we have maximum of 6 open trades, our investment is $6,000, so our ROI would be 1,000 / 6,000 = 16.7%. However, Portfolio Return is 10% since the total size of the portfolio is $10,000.

 

ROI will always be higher than Portfolio Return since we keep portion of our funds in cash.

 

If we increase the allocation to 15% per trade, our return per trade will increase to $75, total investment to $9,000, total return to $1,500. The ROI will remain the same (16.7%), but the Portfolio Return will increase to 15%. This is an important point: the ROI will always remain the same, but the Portfolio Return will vary, depending on the allocation.

 

Compounding vs. non-compounding

 

Next thing to clarify is compounding vs. non-compounding. Non-compounding means that we allocate a constant amount of money to each trade. In case of 10k portfolio and 10% allocation, that would be $1,000. Compounding means that as our account grows, we increase our dollar allocation to match the new portfolio size. For example, if we made 10% on our first $1,000 trade, portfolio value is now $10,100 and we will allocate $1,010 to the next trade instead of $1,000. Compounding will have a significant effect on portfolio returns. Our model portfolio uses 10% per trade allocation and compounding, while our ROI is non-compounded. This is actually pretty conservative since it leaves at least 40% of our funds in cash. 

 

Pro-Trading-Profits reports

 

As you know, our performance is verified by Pro-Trading-Profits, an independent website tracking the strategies of trading newsletters and advisories. 

 

The report was generated using the default PTP allocation which is 15% per trade and zero commissions. We present this report ex-commissions to make it comparable to other services which present performance data ex-commissions as well.

 

Lets see some examples to demonstrate how performance is affected by different parameters.

 

If you go to the "Monthly Returns" tab, you will see the following table: 

 

 

This table might look familiar to you - it appears on our Performance page and is taken directly from the PTP report.

 

Now lets see what happens when we use commission structure of $0.75 per contract and no base rate (which is what I pay at Interactive Brokers):

 

 

As you can see, the impact of commissions is about 2-3% per month on the whole portfolio. In some months it was higher because we traded more, but with 15-20 trades per month, 2-3% per month would be pretty typical, assuming $0.75 per contract. It also seems that in 2013 PTP changed the way they calculate commissions, so you might see higher impact in 2012, but 2013 gives better representation of impact of commissions.

 

You can change the commissions structure and see the results. You can also play with different allocations and see how that would affect performance. 

 

I hope this article helps to clarify some misunderstandings about performance reporting. Let me know if you have any questions.

Comment: Pro-Trading-Profits closed a while ago, after tracking our performance for 3 years.

[tjlocke99 18]

Well done Kim.

 

Do you have the ROI segmented anywhere into pre-earnings straddles/strangles/RICs vs all other trades?

 

Thanks.

[Kim 7,943]

I don't have those statistics. My estimate is that in times of low volatility like we have seen in 2013 so far the straddles/strangles average return will be around 2-3% before commissions. However, look at August 2011 and May 2012 performance - ALL of the gains in those months came from straddles/strangles. In July 2012 straddles/strangles were also responsible to most of the gains.

[Yowster 9,159]

Thanks for this link.  One additional thing to note when following the link and playing with the commission structure that a given broker uses.  The second chart above (with the IB commissions structure) assumes a "trading bank" of 100K which I believe caused each trade to be 10K using the 10% rule.   If you change the trading bank to a lower value (say 10K or 25K), it does effect the percentages.   The most drastic change is when your broker uses both a base rate and a per contract rate - a lower trading bank with this type of commission structure can lower the percentages quite significantly.

[Kim 7,943]

Thanks for this link.  One additional thing to note when following the link and playing with the commission structure that a given broker uses.  The second chart above (with the IB commissions structure) assumes a "trading bank" of 100K which I believe caused each trade to be 10K using the 10% rule.   If you change the trading bank to a lower value (say 10K or 25K), it does effect the percentages.   The most drastic change is when your broker uses both a base rate and a per contract rate - a lower trading bank with this type of commission structure can lower the percentages quite significantly.

You are absolutely correct. 

 

When you lower the bank to 10k, few things will happen.

 

First, the system calculates each trade based on number of contracts you can buy to fit your allocation. No partial contracts. So for example for a spread which costs $800, with 10k bank and 15% allocation, you will be able to buy only 1 contract (which will give you 8% instead of 15%), while 100k will allow you to buy 18 contracts or 14.4% allocation. So 100k gives you "cleaner" picture since most of the trades will be really close to the selected allocation.

 

Second, with lower bank, commissions structure with base rate will have a drastic effect on the performance. For example:

Lets take a $250 2 leg trade. With 10k bank and 10% allocation, you will buy 4 spreads and pay total $12 in commissions which is 1.2% of the trade value. With 20 trades, total commissions will be $240 or 2.4% per month.

However, if you pay $8 base rate per trade, this will add $16 per trade or $320 total per month, bringing the total commissions to $560 or 5.6% per month of the account value. With higher bank, the dollar amount of the base rate stays the same, but it will be much lower as percentage of the total account.

 

Third, the report includes the monthly subscription fee of $99. For 10k bank, that's 1% per month. For 100k bank, that's only 0.1%. 

 

I hope you can see now why I preach all the time to find a broker with no base rate, especially if you trade smaller accounts.

[fradav 1]

Good job Kim, that's an impressive performance record over time, with and without commissions 

Edited August 9, 2013 by fradav

[fradav 1]

To put some meat on the bones of my comment that I think it's a very impressive performance, I've gone though some comparisons of how I'd have fared with $10,000 in capital at the start of SO inception, i.e, July 2011, by making various common investment choices (please add a comment if there's another comparison you can add). Please note these are very approximate and don't include dividends/commissions (which skews results in SO's favor). However, the differences are so striking these factors won't have any major impact on the take home message.

 

If I'd put it into SPY ETF:

 

Taking profits off table at end of each year-

2011---(6 months) 10,000 --10,200 ($200)

2012---10,000-12,000 ($2000)

2013---10,000-12,000 ($2000)

 

Compounding

 

2011-2013---10,000-14,200 ($4200)

 

Total profit $4200

 

If I'd invested in popular common stock 

 

10,000-12,000 AAPL (total profit $2,000)

10,000-15,000 GOOG (total profit $5,000)

10,000-50,000 TSLA (total profit $40,000 minus $250 for crystal ball so $39,750  )

 

If I'd followed a commercial delta .1 Iron Condor service (e.g. MCTO)

 

 

2011-10,000-9900 (-$100 loss)

2012-10,000-15,000 ($5000 profit)

2013-10,000-12,500 ($2500 profit)

 

Total profit $7400

 

If I'd followed Steady Options

 

Taking profits off table at end of each year:-

2011-10,000-32,000 ($22,000)

2012-10,000-24,000 ($14,000)

2013-10,000-17,000 ($7,000)

 

Total profit $43,000 (less with commissions!)

 

If I had the time I'd also like to display occasional monthly drawdowns on each of the above, which would put SO losses into perspective (risk management is excellent). The diversity also provides a much better protection against a crash than most of the above.

 

There are weaknesses of course, >$100k accounts, whether trading style is compatible with full-time job, timing of entry, etc, but all in all it's hard to argue with the above numbers.

 

For the sake of transparency, I've still to place a single trade advised here, been a member for 2-3 months and have been simply observing and learning (have been actively trading but following my own ideas). But as anyone who's been trading for any length of time will know, it's hard to beat the market no matter how clever you try to be. If I'd looked at SO's returns a few years ago I'd have thought "Not bad but I can beat that". But I haven't and I now look at them with much more respect. 

 

Any criticisms/flaws in my logic welcomed. 

Edited August 10, 2013 by fradav

[PaulCao 51]

Hi Kim, 

 

Thanks for posting your monthly performance for the month of September. Not sure about for everyone else, it was also a down month for me given the Syria situation, FOMC surprise decision not to taper and then capped by the US gov't shutdown. So I think for anybody is a net option seller, it wasn't a good month. 

 

Can you give us an idea what trades you felt were bad or good that offset the losses? E.g., was it the calendar spread's on AAPL, IBM or RUT where we had to adjust several times or close as the realized vol turned out to be higher than expected. Or did the earning straddles of stocks with high beta ratio benefit a lot from the volatility spikes this month and offset the loss somewhat? Or the closing of the VIX calendar with 100% loss?  

 

Best,

PC

[Kim 7,943]

Hi Kim, 

 

Thanks for posting your monthly performance for the month of September. Not sure about for everyone else, it was also a down month for me given the Syria situation, FOMC surprise decision not to taper and then capped by the US gov't shutdown. So I think for anybody is a net option seller, it wasn't a good month. 

 

Can you give us an idea what trades you felt were bad or good that offset the losses? E.g., was it the calendar spread's on AAPL, IBM or RUT where we had to adjust several times or close as the realized vol turned out to be higher than expected. Or did the earning straddles of stocks with high beta ratio benefit a lot from the volatility spikes this month and offset the loss somewhat? Or the closing of the VIX calendar with 100% loss?  

 

Best,

PC

All trades are on the performance page. Without the VIX trade, this was actually a profitable month. Most earnings straddles performed reasonably well (except AZU), we had two RUT calendar winners, and AAPL and IBM are not closed yet. Obviously the VIX fly had a major impact on the performance.

[V_NAM 23]

I am new to SO and may be this is answered some where else, but I could not locate it.

When a trade is recommended, you also shows the debit amount per contract that it was executed at. Sometime it is not possible to get the trade at that price.

In general how much higher can we go over the price you executed the contract at. Obviously this can have a great impact on the portfolio performance.

 

[Kim 7,943]

18 minutes ago, VNambula said:

I am new to SO and may be this is answered some where else, but I could not locate it.

When a trade is recommended, you also shows the debit amount per contract that it was executed at. Sometime it is not possible to get the trade at that price.

In general how much higher can we go over the price you executed the contract at. Obviously this can have a great impact on the portfolio performance.

 

We don't recommend to chase prices. We also recommend to start with paper trading and not placing live trades few days after the start of your subscription. Obviously if you chase and bid the price higher, the MMs will be more than happy to sell you at higher prices. Last examples are both CRDW trades where you could get similar or lower prices shortly after our entry.