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!