Basic question #5 in the "taking one for the (B) team" series. How do you measure "success" in an options trade? The question sounds trivial, but maybe it is not? Any real broker would give you a modeled profit vs share price curve, as a function of time. This assumes that the IV structure doesn't change. Something like below. I also plot the share price, and +/-1 SD and +/-2 SD bars (where the expected move is computed for the full DTE) I suppose you could just integrate under the curves to determine an "average profit" vs DTE. But it doesn't seem to make sense to integrate out to +/-4 SD, since you'd presumably close the position long before that. I'm currently computing average profit over the +/- 1 SD range, and the POP, for each DTE. I'm not exactly sure how to compute a "return on capital", since for a short premium strategy, you'll take in credit. I see many people basing ROC on profit/buying power reduction. I'm sure there's much that I'm missing. Thanks in advance for your wisdom.
Max Return/Max Risk * Profit Probability = EV factor. (EV Factor x Max Risk = Expected Profit which seems kind of silly.) I don't count profits until it is made, but you may be able to use that number in some form of performance attribution analysis or early TP. Buying power reduction is Margin Required - Credit. Success is probably best measured by Sharpe ratios calculated over many observations with no monster bets. A disciplined strategy run. I am sure some guys here have fancier methods. I go with canned reports from my broker.
Can you tell me more about your broker's canned reports? Indeed, I started trading 6 months ago and I am looking for any information that can help me grow in experience and knowledge
It is IBKR Portfolio Analyst. It is adequate for me for bottom line performance. But, not very useful in classifying Futures Options trades. If you are running a Portfolio of stocks and stock options, you will get useful sector exposures and appropriate benchmarks. https://www.interactivebrokers.com/en/index.php?f=35620
I just moved the money from my Merrill-Lynch test account into IBKR. Looking forward to digging into that platform. It looks powerful, but complicated.
Oh, the UI is horrible for trading. IBKR would prefer to provide professional features that has low value for retail. They would get a lot more hyperactive retail transaction activity if they designed it like a video game.
I guess we can all aspire to be professionals(?). Or they hope we do. Do you find that IBKR provides most of your useful data feeds, or do you use additional data sources?