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

[Bry]

In fact among professional money managers whose records are audited (as opposed to those who post here) there are only a handful, like less than a dozen, who beat the S&P 500 over a 20 year plus time period. From 1976 to 2012, Buffet returned 19% over the risk free rate. These are people who do this for a living all day every day. So if you're better than Buffet then sure, you can do 20% Otherwise not so much.

Buffet does LOTS of selling cash-secured puts on stocks he wants to own. So there is one options strategy. Either he gets the stock he wanted anyway at a juicy discount, or he gets the premium, maybe a tidy 10-20% (annually). Good method for investors who want to load up on dividend aristocrats long term.

WMT not looking too bad just about now.

 

[jk90029]

As a trade or investment account grows it is wise to reduce risk and accept lower percentage returns as the absolute returns increase. This is why you don't often see long term double digit returns on large accounts, if the account is large enough it's just not necessary. Single digit returns will be enough to cover the financial needs of most investors if the account is multiple millions.

As above, I agree that most investor with relatively small account tend to take more risk, than with large account.
That is why small account is more likely fail to keep fair record.
Probably(?) it is same reasoning as poor people spend to useless purchase than rich people.

My point is that, no matter big or small, one need to hope SAME PROFIT RATE annually compounded.

 

[Butterball]

3. If trading is profitable (understanding “profitable” as more profitable than just buying and holding the underlying), why does that happen? [..] So I wonder if there's also something exploitable when dealing with options. [...]How do you calculate the expected value of buying or selling an option?

Really don't want to bash, but take it from me: You have no idea what you're talking about. Don't try to make a living trading. Stick with poker if it works for you.

P.S. options equal a payoff function that is a fraction of their underlying. What does this mean? You can replicate any option position with a position (long or short) in the underlying. Same exact thing. Once you realize this you will notice your entire post is a bunch of mumbo-jumbo.

 

[Chubbly]

Really don't want to bash, but take it from me: You have no idea what you're talking about. Don't try to make a living trading. Stick with poker if it works for you.

P.S. options equal a payoff function that is a fraction of their underlying. What does this mean? You can replicate any option position with a position (long or short) in the underlying. Same exact thing. Once you realize this you will notice your entire post is a bunch of mumbo-jumbo.

Yep, a lot of people don't realize this is how a Market Maker gets "flat" at the end of each day despite taking the other side of option trades all day long

 

[galvinlee888]

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

If you just want to make up some fancy story to make you feel better, i advice you to go out and find something better for yourself rather than wasting your time here.

I have been in this business long enough, both in institutional and retail. I know how this industry work. No one with such a return can survive in a long term. Don't believe me? Try to find a friend that in broker industry and ask him.

Commission and fees are the only thing work well, together with some derived business such as marketing (your tv news, blog etc), mentoring/education, market making, selling derivatives products, and all other bs things.

You better invest in long term and expect a realistic return of 5 to 10%, even with this you will burst your account eventually if you continue for a long time (no free lunch) . The only hope is this won't happen in your life time.

 

[VTS]

1. Is it possible to make at least 20% expected geometric mean returns per year?

With the word "expected" in there, I'm sure the answer is absolutely yes. I would imagine that a great number of traders "expect" 20% a year and have backtested systems that show it would have made that or more. But what does expected have to do with anything?

All that matters is tomorrow, not yesterday.

Remove that word expected, and the real answer in nearly every case is no. Long-term 20% a year track records are very rare in this business. Allow me to pull a random number from where the sun don't shine, but I'd estimate that less than 1% of traders have made 20% a year for over 10 years.

Probably less than 1% actually have, but likely 20% or more claim they do. go figure...

 

[jk90029]

Long-term 20% a year track records are very rare in this business. Allow me to pull a random number from where the sun don't shine, but I'd estimate that less than 1% of traders have made 20% a year for over 10 years.

If there is ONE person from 400 years ago, at the time of opening stock market in Netherlands, then he and his sons with same trading logic shall take all the wealth in the world now.

Simply calculate 1.2^400.

Since there was NO ONE for 400 years, no person will make annually compounding 20% in the long run. Of course, there are lots of >20% in SHORT TERM.
Poker or lotto are such examples, as well as future/option.

PS) It is only 45 years that Buffet claims compounding 20%, if his record is true as in http://www.berkshirehathaway.com/letters/2014ltr.pdf.
Probably father and grandfather of Buffet did NOT make it.

 

[jk90029]

There is an additional question. (Quiz)

Suppose one person had average wealth 400 years ago. If he (his grandsons) has about 10% of the world wealth now, what is the annual compounding rate that they keep over the 400 years?

Probably there would be other assumption needed, such as that world populations is 0.1M, whereas current population is 3M.

Hint)
If world population grows from 0.1M to 3M over the 400 years, the average growth rate is 1+r=exp((1/400)*log(30)) = 1.008539, by (1+r)^400=(3/0.1), which is r=0.085%

 

[oldnemesis]

The Blind Men and the Elephant

John Godfrey Saxe (1816-1887)

It was six men of Indostan
To learning much inclined,
Who went to see the Elephant
(Though all of them were blind),
That each by observation
Might satisfy his mind.

The First approached the Elephant,
And happening to fall
Against his broad and sturdy side,
At once began to bawl:
"God bless me! but the Elephant
Is very like a wall!"

The Second, feeling of the tusk,
Cried, "Ho! what have we here
So very round and smooth and sharp?
To me 'tis mighty clear
This wonder of an Elephant
Is very like a spear!"


The Third approached the animal,
And happening to take
The squirming trunk within his hands,
Thus boldly up and spake:
"I see," quoth he, "the Elephant
Is very like a SNAKE!"


The Fourth reached out an eager hand,
And felt about the knee
"What most this wondrous beast is like
Is mighty plain," quoth he:
"'Tis clear enough the Elephant
Is very like a TREE!"

The Fifth, who chanced to touch the ear,
Said: "E'en the blindest man
Can tell what this resembles most;
Deny the fact who can,
This marvel of an Elephant
Is very like a FAN!"

The Sixth no sooner had begun
About the beast to grope,
Than seizing on the swinging tail
That fell within his scope,
"I see," quoth he, "the Elephant
Is very like a ROPE!"

And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!

 

[Bry]

If there is ONE person from 400 years ago, at the time of opening stock market in Netherlands, then he and his sons with same trading logic shall take all the wealth in the world now.

Simply calculate 1.2^400.

Since there was NO ONE for 400 years, no person will make annually compounding 20% in the long run. Of course, there are lots of >20% in SHORT TERM.
Poker or lotto are such examples, as well as future/option.

PS) It is only 45 years that Buffet claims compounding 20%, if his record is true as in http://www.berkshirehathaway.com/letters/2014ltr.pdf.
Probably father and grandfather of Buffet did NOT make it.

Marty Schwartz has/had a proven and verifiable track record of growing at 20% per MONTH. This is a track record for years, and the most he ever lost in a month was 3-4%. He lost 20% in the crash of '87, and made it all back before the end of that same month!
He didn't compound long term. He would start with $400k and pull out $600k when he reached $1M, repeatedly. Naysayers, naysayers, this guy is real. There are a few olympic gold medalist traders. They probably don't waste their time at elitetrader.com. Schwartz wasn't giving away his secrets.
Some minds learn to become hyper-competent at trading.