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

[ktm]

That is interesting. Probably a capital intensive business, right?

Probably not capital intensive, but it's super long term. It's standing timber...basically pine trees to be cut into pulpwood. They grow a bit faster than hardwoods. You basically buy a plot of land in the middle of nowhere and manage the crop, which isn't that hard. Each year, based on pulpwood prices you decide whether to do any harvesting or not. Prices are high, you harvest a lot - pulpwood prices are depressed, do nothing. They only harvest a small section at a time and then replant seedlings in those areas.

The vig comes in the form of additional side income. You can bail the pine straw that falls from the mature trees and sell that and you can do well to offer hunting permits on the land as well if it's placed correctly. There are other things you can do with a large rural plot like that to juice the income while you wait for your trees to grow.

I never got into it, but I think it's pretty cool.

 

[BrandNewTrader]

A little aside, but the range of returns is hugely variable depending on which class of investors you are talking about. There are traders out there making over 100% ROI year over year, but don't compound their returns because if they get too big their strategy loses edge. I personally know a guy who started trading in 2003 with $20k. Made and lost his account plenty of times for the first 3 years, then hooked up with a solid team. Found a REAL mentor and turned 25k into 500k in a few years. Did he get to 5M? Nope. He stopped compounding at 500k and can now make 500k a year on a base of 500k, but he claims that moving into the 7 digits would put him over his "risk comfortability threshold" and probably fuck up his trading. I've deduced that he sells options and is making a damn good living trading at his size/risk/reward limit. Will he get out before he blows?

Could he try and build out, get some references and manage institutional money? Sure... but that comes with all of the institutional overhead and bullshit. A guy trading half a mil to a mil in capital a year can do as well for himself as a mid-level institutional trader on a $100MM book or a small HF portfolio manager with $25 to 50M in mandate...

Back to your 20%... To make 20% a year I would need to make an average of 1.531% per month for 12 months, assuming I compound my monthly returns. This is quite doable selling options, granted you know how to manage your risk (most don't).

 

[Timetwister]

A little aside, but the range of returns is hugely variable depending on which class of investors you are talking about. There are traders out there making over 100% ROI year over year, but don't compound their returns because if they get too big their strategy loses edge. I personally know a guy who started trading in 2003 with $20k. Made and lost his account plenty of times for the first 3 years, then hooked up with a solid team. Found a REAL mentor and turned 25k into 500k in a few years. Did he get to 5M? Nope. He stopped compounding at 500k and can now make 500k a year on a base of 500k, but he claims that moving into the 7 digits would put him over his "risk comfortability threshold" and probably fuck up his trading. I've deduced that he sells options and is making a damn good living trading at his size/risk/reward limit. Will he get out before he blows?

Could he try and build out, get some references and manage institutional money? Sure... but that comes with all of the institutional overhead and bullshit. A guy trading half a mil to a mil in capital a year can do as well for himself as a mid-level institutional trader on a $100MM book or a small HF portfolio manager with $25 to 50M in mandate...

Back to your 20%... To make 20% a year I would need to make an average of 1.531% per month for 12 months, assuming I compound my monthly returns. This is quite doable selling options, granted you know how to manage your risk (most don't).

If those returns are sustainable, they are impressive. Even if he can't keep reinvesting more money, and there's a "cap" on how much he can profit, $500 000 per year is excellent, also in relative terms (unless you have like $50M).

Nowadays I'm mainly reading about selling options, so I'm glad to read more examples of people doing well doing that. But I don't know how can he make 100% per year that way, unless he daytrades or risks too much.

 

[jk90029]

Just because a young weed grows a foot in a week doesn't mean that it will be 300 feet tall in six years. Weeds do not grow to the sky - the fallacy of extrapolation.

Probably, you mean it is quite possible to grow 30% from 10K to 1000K, and 20% from 1M to 100 M.

Isn't it?

 

[jk90029]

A
Found a REAL mentor and turned 25k into 500k in a few years.

For the above, I do not believe you.

For example, if it grow from 25K to 500K in five years, then annual compounded growth is r=0.82=82% by 25*(1+x)^5=500 and exp((1/5)*log(500/25)) = 1.820564.

Suppose the mentor exists, why he still behave as a mentor? He should be rich now.

Best way to show that the mentor is NOT poor is to show the record like Buffet, as in http://www.berkshirehathaway.com/letters/2014ltr.pdf with enough long time like 10 or 20 years.

PS) Furthermore, most (many?) ETers trade more often than Buffet so that ETers pay more commission and federal income tax (yearly).
Suppose he pay 5% of January asset to yearly commission total and 20% of the December profit to FedIncomeTax, then he is even although he shows annual 25% profit (before expense of comm and tax).
Therefore if one want to bring annual 20% to home, he must show annual comppounded 45% before expense.

 

[ktm]

Probably, you mean it is quite possible to grow 30% from 10K to 1000K, and 20% from 1M to 100 M.

Isn't it?

All I'm saying is that everything changes as you grow. The market dynamics, your financial position, your tolerance for risk...your emotions. Pushing around a few MM when you started with 20-30K has an effect on most humans.

I have the same limitations as BrandNewTraders friend. I can generate great returns every year, but I have a limit as to how many contracts I can run before the strategy exposes itself. And how much of my net worth do I want sitting in my brokerage account? That may be more risky than the market itself, who really knows?

At some point you just start pulling funds out and storing them and doing what you want in life. Keep the nest egg in the brokerage account to keep regenerating the annual income, plus a backup cash pile in case something bad happens there...and the rest goes into something super safe and somewhat liquid. Like BNT's friend...500K a year is rock solid and I totally understand his position. I don't want my name on a building somewhere, but I don't want to fly commercial either. Everyone has their goals.

 

[BrandNewTrader]

If those returns are sustainable, they are impressive. Even if he can't keep reinvesting more money, and there's a "cap" on how much he can profit, $500 000 per year is excellent, also in relative terms (unless you have like $50M).

Nowadays I'm mainly reading about selling options, so I'm glad to read more examples of people doing well doing that. But I don't know how can he make 100% per year that way, unless he daytrades or risks too much.

Here's a hint. Guy decides to make 5% a month selling options. Before this he takes a few months to properly and thoroughly understand the greeks. While he is short these options he is in the market daytrading against his position, to hedge. You fill in the rest. Execution is the majority of the game.

The plans are easily developed. How many can execute with precision over time? When does he stop compounding and begin trading a steady amount of capital? If he waits too long he ends up with too much size which leads to bad/panic decisions and real $ loss. Not pretty. Execution is where psychology, experience and intelligence come into play.

 

[BrandNewTrader]

For the above, I do not believe you.

Ok. You don't believe me.

For example, if it grow from 25K to 500K in five years, then annual compounded growth is r=0.82=82% by 25*(1+x)^5=500 and exp((1/5)*log(500/25)) = 1.820564.

It was actually 3 years, give or take a few months. He was fortunate to catch large moves while hedging his short position. Sort of like using front month weeklies to hedge a 45 day position and getting lucky on an OTM hedge.

Suppose the mentor exists, why he still behave as a mentor? He should be rich now.

Most mentors are rich. They mentor for other reasons. Smart equity and easy money, giving back, personal problems with their own kids, some sense of career dissatisfaction, sexual appetite, who the F knows? This mentor in particular is a large NY trader in a Los Angeles-based prop group. My buddy probably helps this guy earn through commissions.


Best way to show that the mentor is NOT poor is to show the record like Buffet, as in http://www.berkshirehathaway.com/letters/2014ltr.pdf with enough long time like 10 or 20 years.

I'm not going to ask my buddy to ask his head trader to provide any statements so I can post them on a public trading forum. Keep believing it's unicorns and bullshit. Either you know you're smart enough and keep exploring until you catch a break, or you have no clue what's going on and you're a moron who would fail at anything remotely challenging.

I lost over $250k of my own funds and $MM client funds in multiple account liquidations over the course of many years before i learned my lesson.

Your post tells me you are a guy who is still learning to understand the market and should adopt moderate expectations and a simple trading method. Stay away from options...

My responses are in the repost above...

 

[jk90029]

Regarding "Your post tells me you are a guy who is still learning to understand the market and should adopt moderate expectations and a simple trading method. That doesn't include options."

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Personally I NEVER trade any derivative like option selling, nor open any derivative account EVER.
It is similar to lotto or no-limit Holdem.

On the other hands, equity is similar to Real estate (long secure asset) with divedend/MonthlyRent

 

[Gambit]

Some retail traders could expatriate. Singapore comes to mind. 0 cap gains boosts returns by a lot.