What is Option Alpha’s average win rate and profit/loss?
Our win rate and average profit or loss overall is, again, found on our live performance dashboard and portfolio tracking page. Our win rate average is consistently above 70% with very high expected average profit to average loss ratio. These open performance metrics show that we are generating consistent income on a long-term basis via our options trading activities. Please remember that we are the ONLY company that records a video each and every night after the market closes showing you our real-money trades regardless of whether we win or lose - and we’ve been doing this for many years now. It’s just another way we differentiate ourselves from everyone else out there.
Can I be successful trading options with a small account?
Yes. In fact, account size has very little to do with your ability to trade successfully and make consistently profitable trades. You can easily make a 70% chance of success trade with $500 as you can with $5,000. With small accounts your focus should shift to making the best use of your capital by only trading really high probability setups with credit spreads and iron condors. With limited capital you have to focus on the low hanging fruit that will help get you quick wins. Of course the more money you start with the higher your overall profits will be but having a small account is not something that will prevent you from finding success so please don’t use it as an excuse! Even as your account size grows, a key factor in your ability to find success trading options is being able to make lots of small trades.
I currently work full-time - how much time do I need to focus on trading options to make it profitable for me?
Depends on how quickly you learn and pick up concepts. You will likely need to invest some time upfront into learning the basics and terminology behind options trading. As with anything worth pursuing in life the ability to trade successfully won't happen overnight or with little time investment. That said, you do not need to quit your job and completely pursue options trading 40 hours per week to be successful. After tracking and surveying thousands of investors that have come through our training program we find that those who are most successful set aside at least 1 to 2 hours per day to options trading if you really want to see very quick success over the first one to three years. Nobody said this was easy but generating consistent monthly income trading options is a goal worth pursuing.
How can I make more high probability trades in my IRA when my broker doesn’t allow them?
Short answer is that you have to increase your overall credit for each trade you make. Since retirement or IRA accounts are limiting in your ability to trade naked or undefined risk trades we are forced to add some sort of “protection” to these strategies in order to make them eligible to trade. For example, if you want to trade a high probability strangle that has a credit overall of $400 your broker won’t allow it since you are short a put and call. However, if you use part of that $400 credit and buy options on either side (say 10 or 15 strikes out) and the cost of that protection is $100 then you are still able to take in a $300 net credit and because the strategy has defined risk you should be able to make the trade. We have a handful of video tutorials inside the membership area that cover this topic in detail and show you how to create synthetic strategies for your retirement account. Just remember to always keep your position size per trade in check. Go as wide as you can to maximize the credit received but don’t get yourself into a position that is too large for your account.
What are the TOP 3 strategies by performance?
Our most profitable strategies by far are the pure short premium (option selling) trades as these are the basis for our entire volatility edge trading options. This includes option strategies such as straddles, strangles, and iron butterflies because these trades tend to have the most aggressive premium selling features. Please note that these strategies work best when implied volatility is high which means you’ll have to be a little more patient as you wait for the best trades to present themselves.
What is a reasonable expectation of how much I can earn each year trading options?
Your ability to generate abnormal returns starts with the number of trades you make that are high probability over the course of a year. The more you can make the more likely you are to hit your probability of profit target and thus generate a great return. There are a lot of factors that go into how much you can earn each year including: position sizing, strategy selection, market implied volatility levels, and number of trades. It's not unreasonable to assume that you could easily generate between 10% and 30% overall each year depending on how aggressive you are with your initial trades and how well you manage risk along the way.
What is the average amount of time you hold a position?
Based on our performance tracking page which you can always see here with live updated figures, our average holding time for all the options trades we enter is approximately 30 days. Further down the performance page, you can see holding times broken out by strategy type to see exactly how long we are holding each individual type of strategy like a strangle versus an iron condor.
I’ve never seen anyone else track “IV Capture Rate” - what is it and why should I care?
IV capture rate is a performance metric that Option Alpha started tracking many years ago. Since our entire trading system focuses on the ability to capture the differentials in implied volatility as our edge in the market we ought to track how good we are at capturing movings in IV right? We basically look at the entry IV level of any particular trade or strategy and then also track and measure the exit IV level. For option selling strategies we want to enter trades when implied volatility is high and exit trades when implied volatility is low. For option buying strategies we want to enter trades when implied volatility is low and exit trades when implied volatility is high. This difference between high and low implied volatility for both selling and buying strategies gives us our IV capture rate where we can actually see how much of our edge is being captured by the difference in implied volatility versus just the underlying stock movement. Again, you'll notice that our highest IV capture rates are found in pure premium selling strategies like straddles and strangles where we are entering trades at very high implied volatility levels and collecting premium for monthly income.
What is the difference between the total win rate and the win rate by strategy type?
When looking at our performance page, you'll notice that the win rate at the top of the page includes the win rate for all strategies and trades that we've placed in our trading history. Further down the performance page we break down our win rate by strategy type. This gives you segmented information about the performance of individual option strategies like straddles, strangles, or iron condors. This is helpful because if you are just looking at trading a particular strategy, you can dig deeper into our performance metrics and see which strategies offer the highest win rate individually. It's important to note that our highest win rate and profit trades are those trades that have short premium where we are selling options. Long premium or option buying strategies for us are used mainly as a hedge and generally tend not to produce money as stand alone components for our portfolio.
What is the best option strategy with the highest return on capital?
The highest return on capital strategies are risk defined strategies like credit spreads and iron condors however these are not the most profitable strategies when you look at overall total dollar profit and loss statements. They do have a high return on capital because they do not require high margin amounts but with the added protection from buying the outside legs of the spreads you will generally have a reduced profit in total dollar terms. In either case we find that option selling strategies, whether undefined or defined risk types, would give your portfolio consistent gains over a long period of time.
How do you calculate return on capital or return on portfolio?
First you need to figure out how much capital the option position you are trading will require in either cash or margin. For this example let’s say that the margin requirement for selling a credit spread is $500. If you take in a $75 credit then your return on capital is $75 / $500 = 15%. However this is not your return for your entire portfolio. If this $500 position represented 5% of your portfolio then your 15% return on capital is actually an overall return on portfolio of 0.75%. Here I took the 15% divided by 5% allocation size = 0.75% return overall.
How often do you adjust or hedge trades that go bad?
As a standard course of business, we do not prefer to hedge or adjust many of our trades as we prefer to let the probabilities play out overtime. We realize that we will be “challenged” or “tested” on some trades early based on probabilities, yet more than half of the times that we are challenged the trade will come back around and end up being a profit. Again this is not based on theory but rather factual evidence based on an option’s strike price probability of touch and probability of expiring ITM. For this reason, we generally only adjust less than 10% of our trades. Whenever we do make an adjustment, it is always for the sake of reducing risk and reducing our potential loss on the trade, not necessarily making an adjustment to increase our profit.
What market setups do you make the most money trading options?
It should come as no surprise that most of the money we make as options traders comes when implied volatility is high and heading lower. This gives us the greatest statistical edge in the market because option pricing is so much further from what true levels should be. Knowing this you should always strive to be more aggressive during periods of high implied volatility and less aggressive and conservative during periods of low implied volatility.
I have a small account - should I increase my position size to make more money?
Possibly. Depending on how small your account size really is you might need to scale up your allocation per trade so that you can get into single one lot trades. For example, if you are starting with $3,000 and maxing out our allocation suggestion at 5% per trade, that would mean that each position should carry no more than $150 of risk. You might have to increase this risk level slightly above the 5% level in order to get into some small credit spreads and iron condors. (NOTE: This is why we suggest at least $5,000 to start trading options). However, this shouldn’t be a general rule for anyone with more than $5,000. I have found after coaching hundreds of students that in mostly all of the cases I've seen you do not have to increase your position size but rather increase the number and frequency of the trades to make more money.
It seems like high probability trades have a very small dollar win value - but how can I make more money?
Remember this is a big game of math and numbers so don’t trick yourself into thinking that bigger positions or more risk equals will translate into more money in your trading account. The only way stay in this business long-term and generate income consistently over time is in fact to keep your trades small and profitable. These small winners add up and will more than overshadow a couple big losers. The math works if you are on the right side of implied volatility and stay consistent. If you want to make more money then you need to either invest more money or increase your position size, which again only works when you invest more money. This might not be what you want to hear but it’s what you need to hear.