Credit Spreads - Reasonable Returns?

[fakie99]

Quote from polpolik:

Lej, I must have mistaken the OP's question to be return on actual account value. I wasn't saying 3% on margin used. I meant 3% of actual account value would be a reasonable profit target.

Which basically means, collecting about 3-4k of credits per 100k account size would be reasonable.

i was actually referring to the REAL YIELD of the trade, which would mean return on margin tied up for the period. ( ie credit of 100 on margin requirment of 2000 = 100/2000 = 5% return on margin)

i think return on actual account value would be irrelevant, because i am basically concerned with only the amount i have at risk (margin requirmeent)

 

[lejmorro]

Quote from fakie99:

thanks......a couple of things stand out to me even without doing caculations. i think qqqq was trading at around 44 when you put this IC on back on 1/28. the strikes you chose are pretty tight - 38-42 on the low side, 46-50 on the high side. that means that the underlying need only move 2 points in either direction to hit your short strikes. although with strikes that tight, the premiums are better. i do not know the probabilities of that trade, but that tight a set of strikes would make me nervous. (did you leave this trade in place or get rid of it early?) anyway, that is a great return and it looks like you actually did OK. also, i noticed you planned on this trade for about a month and a half (1/28 - mar expiration). again, i think premiums are better in the longer time frame, but i tend to do spreads only with less than a month to go til expiration. personal prefernce i suppose - it just makes me nervous as hell to leave a spread on for that long in this damn market.

I think if I had a large number of contracts on, I would be nervous too about that 38/42/46/50 condor! As you can see from the spreadsheet I closed the puts when the 42 strike was threatened. As I said, I'm just experimenting.

Also, I am usually doing more conservative spreads with higher probabilities. And on the length of trade, I am still uncertain when to go in and when to get out. It's a question of taking on enough risk to make the whole thing potentially worthwhile without taking on too much.

 

[MTE]

Quote from fakie99:

i was actually referring to the REAL YIELD of the trade, which would mean return on margin tied up for the period. ( ie credit of 100 on margin requirment of 2000 = 100/2000 = 5% return on margin)

i think return on actual account value would be irrelevant, because i am basically concerned with only the amount i have at risk (margin requirmeent)

I disagree. The return on the actual account is of great significance cause you don't load up on the positions so that the margin requirement is equal to your total account size, in which case the return could be great, but the risk of blowing up will be great as well. So you need to keep a good portion of your account in cash, hence the return on your total account will be much lower than the return on a particular trade.

Looking from a different perspective. Say you are running a fund. Your investors are only interested in the total return of the fund not the return on your individual trade or capital at risk.

 

[fakie99]

Quote from MTE:

I disagree. The return on the actual account is of great significance cause you don't load up on the positions so that the margin requirement is equal to your total account size, in which case the return could be great, but the risk of blowing up will be great as well. So you need to keep a good portion of your account in cash, hence the return on your total account will be much lower than the return on a particular trade.

Looking from a different perspective. Say you are running a fund. Your investors are only interested in the total return of the fund not the return on your individual trade or capital at risk.

you are absolutely right - from the standpoint of margin vs acct value it is very important. i guess i am looking at ways to evaulate each trade on it's own so i can determine what the benefit of doing good spreads is. i mean, if the overall return expectation is only a couple of % pts per month, i could throw all my money in a good mutual fund and get close to that return (in a good year!) i am just wanting to evaulate a spread trading strategy on a return basis because spreads are (to me) alot of work and worry that i would want to justify with outsized returns when done correctly.

 

[lejmorro]

Quote from polpolik:

Lej, I must have mistaken the OP's question to be return on actual account value. I wasn't saying 3% on margin used. I meant 3% of actual account value would be a reasonable profit target.

Which basically means, collecting about 3-4k of credits per 100k account size would be reasonable.

Thanks, pol, for the clarification. This equates to 36-48K per year which is worth aiming for.

Cottle, in his intro to 'Options Trading:The Hidden Reality" states "the best options traders make about 100% per year consistently. This is about 6% per month after commissions. A realistic goal should be about 2-3% per month."

This compares to your reasoning. So I am looking for 2% minimum and aiming for 4%.

 

[theta636]

Quote from lejmorro:

The posted spreadsheet details a March QQQQ iron condor with $400 margin, $99 final net credit after commissions and 99/(400-99) = 32.89% return.

====================
your max return going into the trade was 179/max loss = 179 / (400-179) = 179/221 = 81%

your actual return = final net / max loss = 99/221 = 44.8%

Looks like you used your final net credit rather than your opening net credit when figuring your gain. Good news is you gained 44.8 instead of 32.89%

Nice return and a very good thing that the stock jumped up after dropping to 41.26 on 10 March, otherwise....

 

[lejmorro]

Quote from theta636:

====================
your max return going into the trade was 179/max loss = 179 / (400-179) = 179/221 = 81%

your actual return = final net / max loss = 99/221 = 44.8%

Looks like you used your final net credit rather than your opening net credit when figuring your gain. Good news is you gained 44.8 instead of 32.89%

Nice return and a very good thing that the stock jumped up after dropping to 41.26 on 10 March, otherwise....

Thanks for pulling me up on the calcs. I did have the 44.8% return in the spreadsheet under the % Return from Max Risk column. Then I got confused when I read the PowerOptions link. In there he states -

% Return = (Net Credit) ÷ (Margin - Net Credit)
Where...
Margin = SOLD PUT strike price - BOUGHT PUT strike price
Net Credit = Premium on SOLD PUT - Premium on BOUGHT PUT .

If net credit is Opening Net Credit then we have the 81% return.
If net credit is Final Net Credit then we have the 32.89% return.

To get the 44.8% return, we need to restate the formula as -

% Return = (Final Net Credit) ÷ (Margin - Opening Net Credit)

As the 32.89% return seems to doublecount the debit paid to close the position, it seems 44.8% is the most accurate representation of the return for this particular IC.

All in all, the percentage gain on account size (and 3-4% per month is put forward by the pros as realistic) seems to give the truest and simplest indication of whether you are on a goer or not.