What is wrong with this picture? Is the total loss really 27%? Or is it much higher?
What is wrong with this picture?
- Thread starter Kim Klaiman
- Start date
What is wrong with this picture? Is the total loss really 27%? Or is it much higher?
The "Results" column percentage basis is the $2 spread width for each underlying.
(So, that much is consistent.)
Otherwise,
(So, that much is consistent.)
Otherwise,
Technically - yes. But put and call spreads are the same trade - they form an iron condor. Calculating gains on each one of them is meaningless. If one of them gained 5% and the second one lost 100% - the iron condor still lost 100%. Doing an average of 6 positions is extremely misleading.
As @truetype mentioned:
Total credit was 0.48 on three $2 wide iron condors. So the risk was 600-48=552
Total debit: 3.61
Total loss: 313, 56.7% loss on the risk capital.
To put things in context, it is a screenshot from one of the options advisory services. This is how they manipulate their track record, and this is why people consider this industry so corrupted.
Or if you consider loss as percentage of premium received... ouch!
Well, this is not the correct way to calculate P/L. Getting 0.50 credit on $2 spread is not the same as getting the same credit on $5 spread, so the P/L will not be the same.
However, when selling low delta credit spreads and aiming for 5-8% return on risk, general rule of thumb is not to allow the losses to exceed 1.5 time and average gain. So if your get an average of $0.15-0.18 credit on a $2 spread, you should not allow the loss to get bigger than $0.25-0.30. Otherwise one bad month will erase months of gains.
But the point here is not only catastrophic loss, but a very deceptive way of reporting it.
This is why when someone reports 80% winning ratio, it doesn't mean much - unless you check the average gain on winners and average loss on losers.
Your 'catastrophic loss' is another's 'a little run of bad luck'.
People have generally been mealymouthed about their losses and tend to tout their gains.
People have generally been mealymouthed about their losses and tend to tout their gains.