How lucky can a trader be trading options? How far can luck go in making one successful? How many winning trades out of 500 options' picks would you attribute to luck; and how many losing trades would you attribute to ill-luck? How lucky or unlucky have you been trading options? Do you think a trader can or can't be successful trading options by following sound trading rules?
not sure you are asking this the right way. basically if you are a winning trader you are more prudent thinking it's ALL due to luck until you can prove you've traded successfully, consistently (e.g. profitable month after month for multiple years) over many trades (say > 1,000) in many different market conditions & business cycles (bull, bear and neutral). otherwise it's just ego - and probably hubris - talking. you can fairly easily measure your success ratio by examining & tracking the expectancy of your trades. then it's a matter of applying some kind of statistical acid test to the performance. if probability says that after 1,000 trades you are many sigma better than chance, then you MIGHT make a case for skill. p&l, while the ultimate real point of focus, is a deceptive measure. i know of many traders that overestimated their skill levels (including yours truly) and thought their multi-year triple digit returns were proof of expertise - only to be reintroduced to the humbling realities of the market in very painful ways. the best advice i could give to anyone fortunate enough to have turned a small stake into a small fortune from trading is to take out most of that fortune and buy some hard assets . preferably something you can't liquidate very easily.
dummy-variable, can you recommend any reading materials about serious money management? Not the âsoftâ side (âset your stops, cut your losses, let your profits runâ¦â) but some hard math, statistics & probability theory related to various calculations you make and e.g. to your quote from the other thread: âeven if you were successful 90% of the time (a highly dubious claim - which would put you at about 10 standard deviations above the average success rate of traders)â I know there must be lots of information out there, but as with most trading related subjects Iâd probably have to work myself through much dubious stuff as well. In view of your recent posts I'd value your personal recommendations: an article, a link, perhaps a book. Thank you.
that particular quote was half hyperbole, half supposition based on experience. i don't have any hard data but years of personal experience and talking with a lot of traders and brokers pretty much confirms that most options traders - whether winners or losers - are generally right about 50% of the time with most folks falling between 55% and 45% win rates. you can kind of see some confirmation of this if you look at options volume and know something about options pricing. about 50% to 60% of all trading on options takes place around at the money strikes. you probably know that the ATM strike is about a 50 delta option with a corresponding 50% probability of expiring in the money. because options are fairly priced at the midpoint between bid and ask, in theory and usually in practice, whether you buy or sell the ATM option, you are likely to win about half the time. if you can buy at the midpoint you will have a net zero change in your capital after a large number of these trades. win rate is obviously only part of the picture when it comes to trading profitably. the important equation is expectancy which is simply your win rate times your average $ won per trade minus your loss rate times your average $ loss per trade. so if you win 50% of the time and average $1.20 per win vs $1.00 loss, your expectancy is .5*1.2-.5*1 = .1 or a 10% positive expectancy. even with positive expectancy you are not guaranteed to be on the path to financial independence. you need to look at something like the velocity or frequency of trades to judge whether you can quit your day job to trade full time. with that above example you can indeed expect to make 10% of your money per trade but for this to be significant (i.e. worth your effort) you have to 1) have enough trading opportunities and 2) avoid risk of ruin. with the example above, if you bet your whole bankroll on a single trade, you will most likely either gain 20% or lose it all. not the best recipe for long term success. but if you limit your trades to a very small percentage of your capital, say 1% or 2% wagered on each trade, you can expect to survive long enough for your system/skills to reach that 10%+expectancy. if you are only betting 1% on each trade (and thus, based on the example, only winning on average 0.1% of your bankroll per trade) you can then see why velocity of trading becomes important: you need a lot of trading opportunities to make your bankroll grow to the point where you can beat even the risk free rate. again based on the hypothetical example, you'd need at least 40 trades per year just to meet t-bill returns of 4% with a winning system that most traders would envy! all this brings me to why i find the claim of 90% win rate and the boast that someone could turn $10,000 into $100,000 in three months absurd. you'd have to grow that $10K around a COMPOUNDED 21.2% return per week for twelve weeks to make that boast come true. if you risk "only" 20% of your capital on one trade per week, you'd have to have each trade more than double (grow 106%) to meet that target. the purported "method" used is to buy ITM options which look to be 70 to 80 delta strikes. to me that means every one of those picks needs to have the underlying move somewhere between 8% and 12% in the desired direction in one week's time. i'm not sure there are such optionable occurrences every week that fulfill this requirement let alone the possibility of accurately finding and predicting the events with "90% success." so sorry for the digression but to answer your question directly, i really don't know specific books. most of what i do is basic college intro level stats & probability. any good text book, or better a local community college course on probability, should give you the fundamentals. i believe some of this type of reasoning is discussed in books by nicolaus taleb and van tharp as well. you could also gain some good tips reading some quantitatively geared gambling books like sklansky on poker and peter griffin or stanford wong on blackjack. you should also google "kelly fraction" or "kelly betting fraction" to find some papers on optimizing betting or position size based on expectancy. hope this helps. i know that i spent a lot of wasted years studying ultimately worthless trading books (especially useless is anything related to technical analysis). for better or worse, i got my real education in the line of fire through actual trading. that's why i really emphasize that new traders need to be focused on fixed risk strategies and miniscule position size. if you can't win with one-lot trades, there's no reason to believe you'll turn things around by increasing your size. do enough one-lots and you'll learn enough to move up to the next level.
This is my math for turning $10,000 into $100,000 with DIA options. Trade #1 60 contracts OTM DIA Options = $8,000.00 Trade #2 120 contracts OTM DIA Options = $16,000.00 Trade #3 240 contracts OTM DIA Options = $32,000.00 Trade #4 480 contracts OTM DIA Options = $64,000.00 TOTAL $128,000 after 4 trades that doubled each. All purchases would be just OTM Puts or Calls with 4 weeks or less to expiration, they can be bought for $1.30 or less. The October just OTM DIA options are selling for $0.60 - $0.40 with 5 days to expiration, those options can easily gain 300% this week, a 200 point move in the DOW would do it. I have chosen DIA options because of the high volume, $0.10 bid/ask spread, strike every $1.00 on an underlining that trades at over $100.00. GOOG, AAPL, QQQQ, OIH, BBH also to consider.
anyone can come up with examples of how astronomical returns COULD be made. e.g. i could show how if you pick the lottery numbers correctly you could turn $1 into $50MM in just one day. the point is that to consistently find options that double in a week and then pyramid this success X times in a row is an extremely rare event. let's take a look at your example: an OTM option that doubles in one week on the DIA. on friday the index closed at 102.83 and the OCT102 put could have been purchased for $0.50. implied volatility is roughly 6.2%. what is the probability of the put being valued at $1.00 in the next week? obviously there are unknowns such as what will happen to volatility but let me simplify the equation: for the 102 put to be worth $1 the index has to expire at 101. first calculate a one standard deviation move in DIA for one week. the formula is P*IV*SQRT(1/T) where P is the asset current price, IV is the implied volatility and T is the time frame examined. for this example the result is 102.83*.062*SQRT(1/52) = .884 so .884 is what the market estimates as a 1SD move in one week in the DIA. we need a move of 102.83-101 = 1.83 for our put to double in value. 1.83/.884 = 2.07SD by checking a normal distribution z-table (or you could use the NORMSDIST function in excel) a 2.07SD move will occur only about 1.9% of the time. but we need that move in one direction (down) so that kind of move can be expected only half that or 0.96% of the time. to put this in terms of odds, divide 1/.0096 and you see that the odds of this option doubling in one week are approximates 104:1 next the suggestion is that you can make this happen 4 times in a row. what are the odds of that happening? 0.0096 ^4 = 0.00000000855 1/.00000000855 = 116,941,240 i think winning powerball offers about the same odds and only costs a buck.
Thatâs not so. You donât correct for direction when using a distribution (Z) table, itâs already done for you. The chances of a 2.07SD move down is about 1.9%. Also you are looking at the probability of doubling your money at expiry. The chances of doubling at any time prior to expiry are much higher. In your example the chances of it touching 101 at anytime are 3.7%. Then consider that there will be some time value prior to expiry, so it wouldnât actually need to touch 101 to double in value. Iâm not sure that there is a closed-form solution for probabilities when considering option time value. Youâd probably need to run a Monte-Carlo simulation. However, if anyone knows how to solve that one by formula Iâd be interestedâ¦. very interesting thread.
Would you also take in to account the range that DIA is trading in over a period of time, say 3 months? If it drops below the average then Calls would be good to buy, once the DIA goes above the average buy Puts. If so then Nov. Calls would be good to buy now. And looking at this time last year maybe stick with calls through to December.