One marketing approach actually used for selling option trading education goes something like this: But is it really? When you understand how options work, you can see that the problem with a statement like this is that they are mixing two different types of data! They are using return percentage for gains and dollars for risk. One would think that options trading returns are easy to calculate, but there are some complexities.
About one year ago there was an article written in a trading periodical about an options trader. To determine the average return of this trader, the writer of the article took each monthly result and averaged 12 months to come up with the average return for this trader.
Why is this a problem? To explain this, we need to know the right way to calculate returns. There are only two approaches: Return on total portfolio balance is as straight forward as it gets.
The answer is not that easy. The missing link is that a lot of option trades will require an adjustment, or series of adjustments during the life of the trade. Adjustments normally require additional risk capital. Professional option traders know this and thus allocate set aside trading capital in case it is needed for adjustments. So in the iron condor example above, the problem the author of the article made was ignoring allocated capital. In some of the positions, the trader in the article made multiple adjustments and increased trading size each time time by 1.
That changes the return calculation drastically. Learn options spread strategies for monthly income from experienced options pros. Click here for more information. Please follow and like us: Subscribe To Our Daily Video Join our mailing list to receive the latest news and updates from our team.More...