Is it possible to make >=20% expected geometric mean returns per year with options? Why?

[Turveyd]

I also see no Math bodge way to beat options, yes in a strong market you can make good $$'s, but in a weak market your pretty much stuck with shorting options, comes down to as always doing the right thing at the right time, which is tricky as it's about predicting the future.

I made GOOD money, wayyyyy beyond 20% in a year, like 1000%++ trading puts in a strong bear market spent loads then lost the account pretty much over night on a gap up and reversal

Obviously your talking of loads of contract, puts and calls same time and short positions of both aswell, to make regardless, still don't see it being consistent and profitable.

 

[lawrence-lugar]

Is it possible to make >=20% expected geometric mean returns per year with options?"

Yes.
but you have to know what you're doing, the devil is in the details, you gotta have the right risk appetite, yadda yadda yadda.
(it's not as clear cut, and simple, and obvious and easy as just simply doing it)

 

[Bry]

Your 3.

The markets are just people, or computers controlled by people. Are people completely random?

If someone yells in a crowded place, "Bomb! There's a bomb here! Everyone get out!" can you predict that people will panic and run? Is that random? So people are not entirely random. Neither are the markets; they are just people.

Now, if HUGE news comes out, like from the ECB early this a.m. (look at the US dollar chart), or the NFP tomorrow (almost guaranteed to affect stocks in a big way), or the Fed meeting in about 12 days (interest rate decision will be a monster)...and a HUGE candlestick forms on the price chart, don't you think that is not random? This can be exploited.

There are other subtle ways that the market behaves like groups (herds) of people.

 

[i960]

Forgive the excessive length. I only post here once in a blue moon these days so there's a lot of thoughts to get out when the mood strikes.

Top-notch post mate.

 

[Q3D]

Your 3.

The markets are just people, or computers controlled by people. Are people completely random?

If someone yells in a crowded place, "Bomb! There's a bomb here! Everyone get out!" can you predict that people will panic and run? Is that random? So people are not entirely random. Neither are the markets; they are just people.

I heard Gary Kasparov used to say the same thing about Deep Blue.

 

[Timetwister]

I presume, more than 1million poker games in a year is figuratively and definately not literally.

There are only 525,600 Mins in a year, so you'd have to play 2 games per minute for the entire year and sleep NEVER!!

Doubt you it 10,000!

It's literal. I played more like 1.6 million per year actually. I played in many tables simultaneously (8-30 depending on the modality I was playing), so I played from 800 to 1500 hands per hour.

 

[newwurldmn]

If it's possible, then that means the market in aggregate makes "mistakes", like there are growth stocks (lower expected returns) and value stocks (higher expected returns).

Sure. If you believe that the cash equity market is not efficient, how can the derivatives off which those stocks are priced be efficient?

 

[Sig]

The basis of my trading method is an obscure branch of technical analysis. TA in the sense that instead of trying to predict future market movements or relying on public opinion to bend to fundamental conditions; the goal is to react successfully to other market participants and their actions.

I think if you're trying to get steep returns, you're likely going to have to use some degree of TA in your operation. What that's going to look like for you; I don't know. There's a huge variety of inputs that one can choose to research. Order books; price movement, volume per unit of time, volume weighted average prices...

Start asking yourself questions, and try to understand how and why the large players do what they do. Read through past threads and you should start to see genuinely successful traders who decide to contribute here occasionally. Maybe their posts will give you an idea to investigate. At this point just keep taking in information and trying to narrow down an avenue of more detailed study that sparks a degree of interest in you, or you have a bit of intuitive feel for.

Make hypotheses and test them as you learn. You can generate a ton of ideas and test them like a madman until you find something with a strong correlation. If a typical liquid stock moves in the same direction for five days in a row, and then the previous day's low is broken; Is it more or less likely to continue in the new direction than usual. Or is there no discernable difference created by that context? What if the initial move occurred on volume above the 90 day average? Or below? Does this change anything, or is there still no strong correlation.

That's just a single idea I came up with while writing this post. Maybe if I tested 50 of those I would stumble upon a really strong and reliable correlation to investigate further. Maybe if I combine several contexts, a seemingly repeatable pattern occurs. After a large enough spike in the VIX within a specific time-frame occurs; maybe there are a few pockets in the resulting reversion that can be reliably exploited by trading vol while properly hedged.

It's unlikely you'll get a specific step-by-step here. Usually individuals who've already undergone the gauntlet will show their results or share bits of their journey which you can incorporate into yours. Recently a member of the forum named monoid really impressed me with some of his posts. I've read some really interesting posts from sellindexvol66 in the past. A large part of my own paradigm of TA comes from a myriad of past work by Spydertrader and jack hershey. KDASFTG posts some real good stuff from time to time. There are quite a few more gems hidden amongst the bickering here. Hope that helps.

Testing a large number of strategies

Your 3.

The markets are just people, or computers controlled by people. Are people completely random?

If someone yells in a crowded place, "Bomb! There's a bomb here! Everyone get out!" can you predict that people will panic and run? Is that random? So people are not entirely random. Neither are the markets; they are just people.

Now, if HUGE news comes out, like from the ECB early this a.m. (look at the US dollar chart), or the NFP tomorrow (almost guaranteed to affect stocks in a big way), or the Fed meeting in about 12 days (interest rate decision will be a monster)...and a HUGE candlestick forms on the price chart, don't you think that is not random? This can be exploited.

There are other subtle ways that the market behaves like groups (herds) of people.

You make a good point, if you're a HFT shop and can run a fraction of a second ahead of the news on that then you've got a legit edge that is replicable and stands up to statistical analysis. "Exploiting" the candlestick afterward is not something that holds up to any rigorous analysis, which is not to say that in your antecdodal case you didn't succeed in 20% profits year after year.

 

[jk90029]

1. Is it possible to make at least 20% expected geometric mean returns per year? With expected returns I mean that you have studied that your strategy in average gives you those returns, considering the expected value of your “play” and the optimal capital management for that strategy. Don't tell me that your strategy can make X% per year, I don't care about that. You also can turn $1 into $1M playing the lottery. I care only about expected value.

Its does NOT matter it is options or others. Note that modern capitalism was held roughly 400 years after opening stock market in Netherland.

If there is one person (one trading logic, starting with average wealth) who kept annual compounded 20% over THE 400 years, then he (and his sons with THE LOGIC) take all the wealth IN THE WORLD.
Buffet and Gates should be empty hands now. It is since 1.2^400 is more than current population.

Since there WAS NO PERSON at all over the 400 years, we can say that there will be NO person with annual 20% compounded in the future too.

PS) Suppose you can live for 40 years from now. Probably1.2^40 = 1469.772 times is maximum.
As for Buffet who spent 50 years in investment, he may make 1.2^50 = 9100.438 times than his original seed.
For example, with a seed of 100K, 100K*9100=910M might be the max, with the above propostion.

Furthermore, I have seen many who attains more than annual 10% compounded.

 

[Timetwister]

Its does NOT matter it is options or others. Note that modern capitalism was held roughly 400 years after opening stock market in Netherland.

If there is one person (one trading logic, starting with average wealth) who kept annual compounded 20% over THE 400 years, then he (and his sons with THE LOGIC) take all the wealth IN THE WORLD.
Buffet and Gates should be empty hands now. It is since 1.2^400 is more than current population.

Since there WAS NO PERSON at all over the 400 years, we can say that there will be NO person with annual 20% compounded in the future too.

PS) Suppose you can live for 40 years from now. Probably1.2^40 = 1469.772 times is maximum.
As for Buffet who spent 50 years in investment, he may make 1.2^50 = 9100.438 times than his original seed.
For example, with a seed of 100K, 100K*9100=910M might be the max, with the above propostion.

Furthermore, I have seen many who attains more than annual 10% compounded.

How much more you can make over just buying and holding depends on how much you want to invest and how big the market is, that's obvious. As your capital keeps increasing, then your expected returns diminish, and you finally can't get more than just buying and holding.

When I created the thread I was thinking about a small amount in comparison to how big the market is (like 6 or 7 figures invested in the US stock market, which is nothing).