Is this possible- 1000% yearly returns on options?

Discussion in 'Options' started by carl1111, Feb 10, 2006.

  1. carl1111


    The following is another post from an options trader- is this possible with any sort of scale?:

    When it is earnings season, and companies are anouncing earings results you have;

    Before hours, regular hours and after hours trading sessions, that are all going to be affected by the news of the announcements. Often the Earnings will be announced during the pre-hours market (trading session) this is going to be your biggest profit of the day.

    Many days during Earnings seasons, you will have 20 or more companies making earnings announcements. Usually at least 5 of them will announce either during the pre-market trading session, and at times (rarely) the regular hours session, and earnings will be announced more often during the extended hours session then they will be announced during the regular hours session.

    You ideally will find a company that announces its earnings, and beats the EPS Consensus estimate by at least 5 cents, and a company that will do the same in regular market sessions, and yet another company that will make the announcment in the after hours session. So if you get an averaged out return of 4% on each trade, you are actually taking advantage of intra day compounding. If your leverage is 4-1, on each trade you will get a total return of 56% in one day, provided you add your profits to each trade (pyramid up, using profits). And this is on trades that are only yielding you a 4% move in the stock itself. Not a big deal. Compared to the guy who uses no leverage who makes the exact same trades and ends up with a 12% profit. If he only trades in the regular hours, his return would be 12% over 3 days, and realistically he will not be able to find enouph opportunities to make trades in the regular hours, because most companies don't announce these things in the regular hours. (most are announced either when markets are closed, or in the pre/extended hours markets)

    What you are going to be looking for is a stock that has traded in the opposite direction of the announcement that makes for the past 7-10 days. You may have to watch 10-15 stocks at once, and memorize were they have been for the past 10 days, as each announcement comes out. That is kind of hard. After it announces that it has exceeded the Censensus Estimate by 5 cents or more per share, (and has traded in the opposite direction of the announcement for the past 10 days) then you have a stock that is tradable. And the moment it makes this announcement, (if it is made during one of the 3 days trading sessions) you must be ready to make the trade within 15 minutes of the announcement. You want to wait for confirmation that the stock is moving in the direction you think it will move, in line with the news. Once your confirmation level is exceeded, (usually between 3-7 minutes after the announcement) you must have the guts and the market knowledge to be comfortable putting on a highly leveraged trade. Now I will often use In the money options in a situation like this. It can be very highly leveraged, i.e. 10,000$ worth of call options will buy you 200,000$ worth of stock. (for example; 80 contracts for the option GS-GS (which was an option for Goldman Sachs) was purchased for 125$. The option increased in value to $590 per contract within 5 hours. So the initial investment was $10,025. Within 5 hours in reaction to news on the stocks earnings, the options were valued at $47,175. Yes, a profit of $37,150, in less then a day. And this was not the only trade made that day. 4 other trades were made, which had a high potential of making money.

    Another aspect of trading is that after you have recieved your confirmation price of a stock moving in the direction you anticipate it moving in reaction to the news, it is generally going to keep moving in that direction. So of course you put on the trade. If the stock does not continue moving in your direction after it has passed your confirmation level, and after you have placed your buy order, it means that you must sell the stock immediately. Stocks in motion tend to continue in motion. Stocks not in motion, tend to continue to not move in price. (this is called a price 'stabilization'. A stock in motion will always have a stabilization period, before it reverses direction in great momentum.

    I would say that easily 75% of my trades are breakeven trades, simply because if a stock doesn't move drastically in my favor after I put on the buy order, I don't want to waste the Opportunity cost of having that amount of money in a stock that is not moving. I can usually find something that is moving, at some point during that day. If my money is not making money, it is considered a loss, because those funds are tied up in a worthless investment. It is actually costing me lost potential earnings by being tied up in a stock that 75% of the time is actually at break even point. (so the account balance is actually stabilized, and I don't have to worry about not being able to compound profits by losing profits on trades that are losing money)

    This is one of the only ways you can have very few losses. You miss out on the opportunities of trades that have momentum, stabilization, and then continue up in momemtum after you have sold, but you do not lose money on the ones that have momentum, stabilize, and then go down. This is extemely valuable in terms of your actual return, because you will rarely have losing trades by giving up on 50% of the winning trades. Its hard to explain, but you end up with an infinitly higher return at the end of the year.

    You go were the action is. The hardest part is sitting and waiting, for sometimes 2-4 days without an extremely easy trade to make on a news announcement. But the reality is that you will generally have 5-6 trades per week, minimum which can make you returns of easily 5% per month. When you are trading consistently with 5% total returns per month with high leverage (and I am saying after losses you are at 5% per month) you are in a position were you really are not making very much money in terms of your actual percentage gains. 5% returns per month for a year, if you are using 2-1 margin is a return of 312%. At 3-1 margin the return is going to be 533% a year. At 4-1 margin the return is going to be 889% per year. By making the exact same trades with 4-1 margin over a year as with no margin, you are in a position were you are getting a return that would not even be considered impressive when done without any leverage. But if leverage is used, and daily or weekly compounding occurs, you are going to end up with 20x the amount of money.

    If you system works, and you don't use leverage, you are not going to have the profits to cover your losses.

    Better and better traders are making returns of 1200% or more. There is simply no way to do this as a stock trader without using compounding and in most cases leverage.

    Frankly, if you are not making returns of over 100% per year, you simply do not know what you are doing. Not that there is anything wrong with that.

    The currencies market is another dimension were you can get up to 100-1 leverage, and if you have a system that takes advantage of compounding in currencies trading you can make even more money.

    There are 35 Billionares in the US alone who manage Hedge funds. This is real.
  2. MTE


    And how exactly are you gonna buy an option 15 min after the announcement if the stock announces pre-open or after close!? Options don't have after-hours trading!
  3. zdreg


    after hour options. i must be missing something.
    what about the spread on the option after the news is released?:) just kidding no after hour session in options + options are not marginable.
  4. novel20


    Bought 80 contracts at about $1.25 and flipped them to $5.90+ in 5 hours. The options have to be out of the money and the movement have to be extremely big.

    It can be done, but not only it takes brain, it also takes guts to go in and sit tight. Right there you got 400%+ return. Now do this easily :D one more time you get your 1600%+ in 2 trades.

    In a table with 10 pokers players, even you got AK, you don't just go freaking all in. However, high risk high return. As long as you don't get hit by the probability of ruin before you rise to the moon, you are okay.
  5. dis


    I do not know about 1000% yearly returns, but I do know that it often takes the market several days to discount a big surprise (c.f. GOOG). One who, withoiut the benefit of hindsight, can tell a big surprise from CNBC hype can make a lot of money by way of leverage.
  6. Carl:

    Seems that you are new to this. Depending on the edge a trader finds, it is possible to make money on various "scales". That "scale" depends on the liquidity of the market you choose, as you always need a counterparty willing to transact. The strategy you outline has several flaws, some of which have been pointed out. Like many before you, you need to get some seasoning and learn more about event trading. You might start with Ben Warwick's book "Event Trading".

    Good luck,
  7. MTE


    Or maybe he/she should take that job at Goldman Sachs. No wait....maybe it's better to work for that options trading firm......or maybe it is still better to go for GS......or maybe not.......:D
  8. You are headed towards all the lessons we all learn about going for the big score. With this mentality, you will become a heroin addict without the needle. After you go cold turkey and get over the shakes, you'll finally stop chasing that crazy crack high.

  9. If it works....and you're making money than go for it. The one thing I would suggest is that you keep this strategy as part of a more comprehensive trading plan and within your entire asset allocation plan.

    Thanks for sharing,

  10. 1000%...?

    Good gosh piker...try ......50,000%

    Compounded continuously...Euler....of course.

    #10     Feb 11, 2006