What Is A Realistic Monthly Income Goal With Option Trading?

A big question I always get is, “How much money can I make option trading?” You may be hoping to get an estimated monthly % return from this article, but truthfully that can not be realistically calculated. However, this morning I found a video from tastytrade, “Formula for Realistic Expectations, ” which answers this difficult question with objective research (linked below). In this article, I will be summarizing this video in a way that is easy to understand. It is my goal that you leave this article with a trading plan that will help you achieve your desired monthly income. 

*Disclaimer- This article is strictly catered to option SELLING. (I rarely buy options)

Criteria Used For Income Calculation

1. Credit Received = $100

2. Success Rate = 90%

2. Profit Management = 50 % max profit

4. Loss Management = X2 the credit recieved

Bear with me because this article is going to be filled with math, but that is how we are going to come to an objective income goal- but feel free to skim through it if you just want to know the results of it all. 

What does all of this math mean? To sum it up-

Assuming you sell $100 worth of options, and manage these options with the criteria listed above- You can expect to make $25 worth of income.

OR

Assuming the above criteria, you can expect to make .25*(credit received). .25= $25/$100

I love this research because it really can help you with portfolio management. Let me explain what I mean: Remember that this data goes on the criteria listed above, 50% max profit, cutting losses when they reach double the amount of the credit received, a 90% success rate, and $100 credit received. 

Watch what happens when we change profit management to 20% instead of 50%

With a 20% profit management you are operating at a loss..

If we really want to manage our trades at a 20% profit margin, this math shows that you would need to compromise with a  higher than 90% success rate. I have found that the criteria for trades given in the beginning of this article to be most optimal for me. 

If you want to make consistent income trading:

1. Keep a record of all of your trades

2. Keep track of your win rate

3. Develop a target profit goal

4. Develop a loss management plan

5. Plug all of these numbers in to the formulas given to you from this article and make sure you are operating at a profit

6. If it does not work, try a new strategy until it does

Lastly, just do not give up and you will find a strategy that works for you! Please comment any questions, and I will be happy to answer them! 

More to explorer

Buying Stocks vs Selling OTM Put Options

I get many questions asking why I choose to trade options over stocks. While the answer is not so simple, I felt that comparing buying stocks to selling puts would best illustrate the benefits that come along with selling options.

Leave a Reply