Is option trading really profitable as a stand-alone trading practice?

Discussion in 'Options' started by T35, Jun 8, 2013.

  1. T35


    As a learner of option trading, I'm reading Lawrance McMillan's several books on options (On options, Options as a strategic-investment) and pretty much enjoy learning from these books.

    However, as I checked McMillan's website with curiosity, I found the track record of his option trading not very appealing at all. ( His speculative option trading is awfully bad (-199% in 2012) and the overall performance as advertised to the subscribed is only 15.6% annually. Considering the big risk, this profitability doesn't look so good.

    This record pretty much shaken my desire of learning to trade options, if a guru like him is performance as this, how good can a new trader be?

    Of course if one only view options as hedging vehicles, his book have taught a lot. But as a stand-alone trading vehicle, is option really worth considering?
  2. I believe the statistics are 90/10.

    i.e. 90 % of people who start out option trading as a primary activity lose money and wash out, 10% make a go of it.

    So it is possible, but highly unlikely that you will be able to make a profit trading options as a primary activity.

    I don't know if there are statistics to support it but it is also 'common wisdom' that the people who are successful sell options rather than buy them.

    I have seen Mcmillan's statistics and believe that is typical for the 10% who survive.

    Not very appealing is it??

  3. I've been trading options for 11 years now, and been making 15-17% annually. I know its not sky-high, I have friends that boast 40-50% trading stocks. But given the risk I am comfortable with, I am happy with waht I make.
  4. I think it can be with extensive back testing but much that is taught by the educators and in books is too simplistic or vague as to how to apply it.

    The books do not really disclose how to trade profitably. They are more like valuable background and hints at best.

    Here is one profitable track record:

    Without adding extensive back testing, or alternatively unusual instincts and experience, I do not think there is anything published that really gives you enough to just trade and win consistently with adequate risk protection.

    There are a few people who can do it but I think it may be out of reach for most.
  5. Having read several books on options, and still reading furiously, I think it is all too easy to develop the mindset "I am an options trader". One then tends to look for instruments to trade favourite strategies, which I personally feel is going about it the wrong way.

    I prefer to look at the various instruments I track, classify as bullish, bearish and range bound, then look at strategies to trade my view. Typically that would be options, for the leverage and efficient use of capital, but it could just as well be the underlying for bullish/bearish. I then evaluate the bull/bear spreads, or butterflies.

    I like options for the ability to clearly define position risk. I get to sleep better and don't worry too much about short term market moves.

    I have looked at credit spreads as a means to have small stable income alongside the potentially higher percentage returns of my debit spreads. The R:R these offer is quite different from what I am used to, so I need to work on a new mindset here.
  6. On the subject of McMillan's return in 2012, the more experienced options traders here have pointed out that if you can't forecast price or volatility with some degree of accuracy, you will lose. Spot on in my experience.

    Perhaps he would have racked up the same losses trading the underlying. It doesn't matter what instruments you trade, if you are wrong about the market you lose money.
  7. McMillan is not a good indicator. There are a lot of people who are excellent teachers but terrible traders.

    If you are willing to invest time and effort in learning, I believe it is possible. But be prepared to lose money at the beginning. it tool me few years and a lot of money lost to become consistently profitable.
  8. I think your question is a great one. I have watched dozens and dozens of retail traders trade and burn out over decades. Options is the surest way to death for them in my experience.

    Two major issues I have seen. Options are a tool, not a way to spice up your trading capital. Some people having 5000 to invest decide to use options because they can buy 100 contracts instead of 100 shares. This is completely wrong thinking. If you asked them if they would go to the bank and borrow every penny you could and bet on red or black at the casino, they would say that that makes no sense to them. Betting 4800 of 5000 on one option play (invariably on SPY since that is where the good traders {like them} go!) makes perfect sense since I can afford the risk. Problem one - oversized risk in their account.

    The second issue is - lack of knowledge. An analogy is that I think trading can be done reasonably well with a "high school diploma" in the markets by retail traders. The knowledge equivalent in options is like a "PHD" level to do reasonably. Most retail run wildly in with if the underlying is going up then buy a call and if it is going down then buy a put. A few trades later they end up wondering what happened and talking about manipulation.

    One rule of thumb I use is that I know personally of 10 successful retail stock traders for each successful option trader (over a business cycle). I think differently than some. When I see that ratio, I assume that it must be a lot harder than it looks and that there is lots I don't know about the subject. Some assume that they are just smarter than the average bear.

    Another rule of thumb, is that those who trade professionally long term don't write books when they are trading well but when they are trading poorly to bring in income to cover their habit. Many good traders write books when they are near the end of their trading careers - that is a different thing. Those who can do - and those who can't teach.
  9. Brighton


    Compared to the 1990s, it looks like Larry has lost his mojo.

    I wonder if he relies more on computer models to make his picks these days. There are multiple strategies and lots of trades but the long term result is only so-so. And the spec option buying seems like a waste of time/commissions/stress for its sub-par returns.
  10. #10     Jun 9, 2013