R/R & POP Concerning Various Spreads?

zghorner

zghorner

Im doing my best to morph from a long options only gambler into an actual trader and was wondering what you all consider as optimal Risk/Return (max loss/max profit) & Probability Of Profit for various spreads? I have to assume that these have an inverse relationship and when one goes down the other tends to go up...Just not really sure what type of payoff ratio I should see on a fly, BWB or other variants -> 3:1 R/R. 40% POP? Where as something like a credit spread might be closer to 1.5:1 R/R, 65% POP? Calendar Spreads? Diagonals?

I understand that the above are not the only things that matter when opening trades, IV/HV for example being equally important I am guessing...But having some ideal/goal numbers for each would be beneficial in selecting strikes and at least get me started in the right direction.

thanks ET.

EDIT: I would like to add that I know this thread may be asking for too much, if you don't feel like typing out an answer for whatever reason perhaps you could suggest a book that goes into detail on this topic, thanks again.
 
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Great thread,and interestingly I am trying to morph into a directional trader and lighten up a bit on spread trading/ Delta hedging..

While I trade limited risk spreads within certain r/r requirements,that is secondary to having edge,or what I perceive to be edge.

My method of quantifying edge is pretty simple and relies on one variable,my forecast vol...

I do not look at POP,but R/R is certainly a factor in how big I will get...
 
zghorner said:
doing my best to morph from a long options only gambler into an actual trader

was wondering what you all consider as optimal Risk/Return
More...

Everyone is essentially gambling in the market, don't kid yourself there...just because you switch styles.

The bottom line to all of this...is your ability to read, predict, and guesstimate the future correctly. And react accordingly to cutting your losses, and maximizing, riding, your gains.
Whether you choose to do this on a daily, intra-day, basis or an annually investing process it's basically the same game.
And you get rewarded based on that risk.

Longer term investing or swing trading is very risky too, because you're, potentially, losing out on the very important current time value of money.

Options can be tricky to truly calculate Risk vs Reward. It's not exactly a 1:1 linear bet, because of something called Volatility. If you nail the buy and sell correctly, during a volatile, unexpected, moment, your gains can be 5X, while risking only 1.
 
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SPX Options Trader said:
Everyone is essentially gambling in the market, don't kid yourself there...just because you switch styles.

The bottom line to all of this...is your ability to read, predict, and guesstimate the future correctly. And react accordingly to cutting your losses, and maximizing, riding, your gains.
Whether you choose to do this on a daily, intra-day, basis or an annually investing process it's basically the same game.
And you get rewarded based on that risk.

Longer term investing or swing trading is very risky too, because you're, potentially, losing out on the very important current time value of money.

Options can be tricky to truly calculate Risk vs Reward. It's not exactly a 1:1 linear bet, because of something called Volatility. If you nail the buy and sell correctly, during a volatile, unexpected, moment, your gains can be 5X, while risking only 1.
More...
The best comment I’ve ever read concerning gambling/trading is this: “Gabling is when the odds are in The house’s favor, trading is when the odds are in the individual’s favor”.

that may not always hold true but I do like it… and multi leg strategies can and should shift the odds towards the individual.

and I know what you are getting at. The fundamentals are more important. Anticipation, discipline, greed and ego check, etc…

Still would like some info relating to the OP if possible.
 
taowave said:
My method of quantifying edge is pretty simple and relies on one variable,my forecast vol...
More...
How do you forecast vol? How reliable is it, I mean how is it working for you? Can you share some info on this?
I am using Implied volatility as a lower study indicator on my price/volume chart. So far it is proving helpful.
taowave said:
I am trying to morph into a directional trader and lighten up a bit on spread trading/ Delta hedgingvol...vol...
More...

I am horrible at picking direction. If I buy a call, stock drops and if I buy a put, it rockets higher.
Believe it or not, once I bought a strangle, it ended in between
 
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emulimu said:
I am horrible at picking direction. If I buy a call, stock drops and if I buy a put, it rockets higher.
Believe it or not, once I bought a strangle, it ended in between
More...


  • You can eliminate the direction variable by always buying calls.
  • In your example you would most likely be ahead if you stuck with calls.
 
taowave said:
Great thread,and interestingly I am trying to morph into a directional trader and lighten up a bit on spread trading/ Delta hedging..

While I trade limited risk spreads within certain r/r requirements,that is secondary to having edge,or what I perceive to be edge.

My method of quantifying edge is pretty simple and relies on one variable,my forecast vol...

I do not look at POP,but R/R is certainly a factor in how big I will get...
More...

How do you forecast vol without a view on d1? Are you going garch or stochastic w regards to vol?
 
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