Lesson Overview

Calculating Expected Portfolio Return

A question I get often is "How much money can I make trading options?" And while this is an incredibly open ended question, getting to the answer starts with figuring out how much money you are allocating per trade.

Once we know this we can figure out how much money we should expect to return on our complete portfolio at the end of the year. From there we'll go through a live example of finding a high probability credit spread in the SPX that returns 8.70%.

Finally we'll show you how to invest just 30% of your money in options trading and earn nearly 15% per year while the rest of your money (70% sits in cash). And even though this sounds amazing you still don't ever want to invest all your money in options trading because too much leverage will blow up your account.

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  • Yep and I mentioned this in the video that we were just assuming all trades worked out to profit for simplicity sake of the concept, but even still if you take the 15% expected loss or move up your strikes to a higher probability of profit spread you can still get to a very high annual return. The key here was the process of how to get there and of course there are a lot of moving parts to see if you’ll actually hit that number but it’s an obtainable goal.

  • You’re math is correct here BUT we were just trying to prove a point with the return numbers first and foremost that you can earn money trading. What I should have done more of in the video is talk about proper pricing (which we did cover here: https://optionalpha.com/members/video-tutorials/pricing-volatility/fatal-pricing-errors ) and what is not factored in is that IV always overstates the expected move long-term. This can be as little as 3% of the stock price or higher in some cases. So when the numbers actually play out you may only have 10% of your trades go bad vs the 15% expected and thus you can see that this overstatement is what leads to long-term profitable trades regardless of where the market goes (again if you properly price the trade). In this example fair pricing would have been $75 not $40 and I think I briefly covered it in the video but could have gone a little further. Does this help?

    • Matt

      Yes, thanks for the follow up here!

  • If you’d like sure but not necessary

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