- 4-month portfolio performance: +37%
- # of trades: 11 completed, 3 currently open
- # losing trades: none
- Average trade length: 39 days (shortest: 17 days , longest: 2 months)
- Futures traded: Gold (6 trades), Canadian Dollar (4), Sugar (2), Cocoa (1) , Soybeans (1)
- Avg. percentage of original premium captured: ~66% (e.g. sell for $600, buy back at $200)
What's interesting is most of the trades have been for expiry dates that are almost 4 months out, but I only held them for about 1/3 of that time (39 days on average) and yet made 66% of the total potential premium in that time. This highlights the true option time decay curve I posted, which showed how you can typically capture about 50% of the premium in 1 month (i.e. the option price should halve in about 1 month).
Another thing I noticed is that commissions/fees are eating up about 12% of my trade profit on average -- much higher than I was expecting before I started doing this, but it makes sense. OptionsXpress commissions/fees on futures options are about $15 per contract. For something like the Canadian Dollar, which is a 'smaller' contract than something like Gold, I'll typically sell 2 contracts and buy those back later for a $60 total round-trip cost for something that might only net me around $400.
3 comments:
I'm curious about something. You said in a previous post that the biggest impact on total returns is the number of losing trades that you have. If you're currently up 37% right now with no losing trades, what would your return be if you had one losing trade. For example, if you looked at all your trades and took one sortof in the middle (premium-wise) and then assume you get out at double or triple the initial premium, what does that do to your overall returns? Does it make 37% gain go to 25%, etc? That would be useful info to know to see the real impact of losing trades.
Yeah, this deserves a post of its own.
The short answer is that at a triple-the-premium exit rule, I'd lose about 7.5% of my portfolio value per bad trade. But if I turned one of my good trades into a bad trade, this ends up being a net 10% drop (explained later below).
Anyway, with one of my trades gone bad, this would drop my 37% gain to about a 24% gain. (The easiest way to show how the 10% loss ends up being a 13% difference is to look at a different example. Imagine I doubled a $100K investment to $200K... a 100% gain. A 10% loss would mean I end up with $180K, which is only an 80% gain. So a 10% loss on a 100% gain results in a 20% difference in the percentages).
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More details:
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Each successful trade I've made has increased my portfolio by about 2.5% (*) on average and each losing trade would lose me about 7.5%. Turning a good trade into a bad trade means I don't get that 2.5% increase for that trade, plus I lose 7.5%, for the combined effect of a 10% drop for each good trade turned bad.
(*) Each successful trade would actually increase my portfolio by 3.75% if I received the full premium, but since I typically exit when I've received 2/3 of the premium, I only end up with a 2.5% increase.
A simple example of all this is say I have a $16000 portfolio and a typical trade in for a $600 premium. On a successful trade, I usually take home 2/3 of this, or $400. On a bad trade I lose $1200 (exiting at 3x premium means the $600 option premium which we received increased 3x to $1800, for a net $1200 loss - a 2x premium loss in the end). You can see how on the $16000 portfolio, the $400 successful trade would be a 2.5% gain, and the $1200 loss would be a 7.5% loss.
It turns out that roughly 75% of my trades need to be successful to break even (ignoring strangles), not 60% like I thought earlier. E.g. 3 good trades + 1 bad trade = +2.5%, +2.5%, +2.5%, -7.5%. I don't know where my previous model goes wrong on this, but now I have a much simpler model based on actual trade data.
So if I had screwed up 3 trades I'd basically be just break even right now.
I should also mention that I have been taking on more risk than I would like to, due to having too much invested in each position.
I'd like each trade's premium to only be about 2.5% (1/40th) of my account size, when as I mentioned, each of my trades have been about 3.75% of my account size.
This 2.5% guideline would allow me to handle a 20x increase in a trade's premium, losing 50% of my portfolio in such a scenario if that ever happened.
2.5% is also not too small that I can't diversify enough. Since the margin required for the types of trades I do is usually about 3x the premium, each trade would require 2.5% * 3 = 7.5% of my account value set aside. Since I want to trade half of my account value, I would need about 6-7 trades of this size open at any given time to reach this (7*7.5% = 52.5%). I could be in 5 different markets with 2 of my trades strangles, for example. Any smaller than 2.5% and it gets too hard to diversify enough.
At my desired trade size, I would increase my portfolio value by 1.67% on each successful trade, and lose 5% on each losing trade.
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