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Success rate
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Success rate

  #1 (permalink)
Elite Member
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Success rate

Does the success rate of a day trader have any indication how well they will do trading options?

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  #2 (permalink)
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  #3 (permalink)
Elite Member
Budapest Hungary
 
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Trading options as a day trader probably yes, trading options as a longer term swing trader maybe not.

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  #4 (permalink)
Patience my young padawan
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I have no experience trading options and you probably have read it, but anyway there is this quote from Eckhardt and Yass in Market Wizards that stuck with me:

Eckhardt bluntly concludes: "The success rate of trades is the least important performance statistic and may even be inversely related to performance."

Yass echoes a similar theme: "The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains."

I don't mean to regurgitate psychobabble but after a lot of backtesting they do make sense...

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  #5 (permalink)
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I think this depends on what you mean by the definition of "success". You could have both a very high win % and overall net P&L by selling massive amounts of out of the money options, but it only takes one black swan to wipe out the account.

If you had a 100% hedged strategy with consistent profitability, that would obviously be very impressive.

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  #6 (permalink)
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I don't day trade but I do short term swing trading; my trades average 1 to 3 days. I am not an option trader, that is, I don't sell options, I don't put on spreads or strangles, nothing fancy. I do however use options exclusively because I like the leverage. You can use options to mimic your strategy as long as you understand how options work and learn to select the correct option that reflects the purpose of the trades you place, for example I never consider volatility or theta, because for a two day trade they are irrelevant to me. You can also backtest your technique, and then backtest s set of options to get an idea of which option is the most profitable for each trade using TOS thinkback. Given TOS will only give the EOD data, it will still give you an idea of of the best delta and strike oat entry and exits.

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  #7 (permalink)
Trading Apprentice
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I don't think so. Every trader has to find what fits his psychology. I was absolutely unsuccessful with intraday trading, a little successful with trading stocks and spreads and I'm ok with options. But as someone mentioned here, options might be dangerous, so don't do crazy trades. In other words, never put everything in one trade.

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  #8 (permalink)
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Lysakat View Post
I don't day trade but I do short term swing trading; my trades average 1 to 3 days. I am not an option trader, that is, I don't sell options, I don't put on spreads or strangles, nothing fancy. I do however use options exclusively because I like the leverage. You can use options to mimic your strategy as long as you understand how options work and learn to select the correct option that reflects the purpose of the trades you place, for example I never consider volatility or theta, because for a two day trade they are irrelevant to me. You can also backtest your technique, and then backtest s set of options to get an idea of which option is the most profitable for each trade using TOS thinkback. Given TOS will only give the EOD data, it will still give you an idea of of the best delta and strike oat entry and exits.

I'm more or less heading in this direction, using the options instead of long or short the stock for swing trading. I'm not 'new' to the markets at all. Fitting a trading schedule to my daily (work, house, hobbies, etc.) can be more of a challenge sometimes.

I was pretty involved with the Selling options on futures thread here but life throws you curveballs sometimes and things change. That along with wating 30 to 50 days to realize a 2 or 3% profit is just too long for me. I do like the leverage that options provide, knowing that it can go both ways, but I'm specifically looking for continuation 'bursts' in the current trend that would magnify the value of the options purchased.

Running a few things by you if you don't mind...

So there is a pullback in the trend for whatever stock you are watching and looking for strength to resume the trend (up or down), let's say up for this example. I plan on:

Scans would be for stocks between 15 an 100 looking for specific setups, decent volume, tight spread on the options, etc. No penny stocks.

1) Buying ITM calls at the current price.
2) DTE would always be the following months expiration; at least 40 days or so to expiration. Current month degrades in premium too fast.
3) Look for the price momentum to continue within 1 to 5 days.
4) Risk rules set before entry, as always.
5) Profit contingent up the move within those 1 to 5 days (or longer depending on the rhythm of the stock) which includes weakness per the price action, volume, technicals...optimal holding time about 3 days. One down move can deflate the premium fast.
6) No buying outright two weeks before any earnings announcements (will straddle only) and no trades the week of interest rate decisions, jobs numbers, etc.

Why not just sell the calls when/where you think you would be taking profit on the purchased calls? I have condidered this but I don't want to lock up the account per the margin required to do this. Ex: selling 5 50 call options on a $50 stock would lock up too much margin and time.

Why not buy the stock and sell covered calls? Again, don't want to lock up all the account margin on a few stocks.

Just buying puts or calls per the stock allows me to be in severals stocks at the same time...5 at the most.

I'm using TOS and their lookback or 'what if' historical trading analyzer is giving me some good results per what I am looking for. Scanning the end of day for the set-up and using the 30min chart for entry and exit.

Any thoughts?

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  #9 (permalink)
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ctmvas View Post
Does the success rate of a day trader have any indication how well they will do trading options?


Considering that HFT has success rate above 95% we should know the answer. But I think intraday trend followers can live with lower success rate in the order of 50%.

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  #10 (permalink)
Elite Member
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opts View Post
I'm more or less heading in this direction, using the options instead of long or short the stock for swing trading. I'm not 'new' to the markets at all. Fitting a trading schedule to my daily (work, house, hobbies, etc.) can be more of a challenge sometimes.

I was pretty involved with the Selling options on futures thread here but life throws you curveballs sometimes and things change. That along with wating 30 to 50 days to realize a 2 or 3% profit is just too long for me. I do like the leverage that options provide, knowing that it can go both ways, but I'm specifically looking for continuation 'bursts' in the current trend that would magnify the value of the options purchased.

Running a few things by you if you don't mind...

So there is a pullback in the trend for whatever stock you are watching and looking for strength to resume the trend (up or down), let's say up for this example. I plan on:

Scans would be for stocks between 15 an 100 looking for specific setups, decent volume, tight spread on the options, etc. No penny stocks.

1) Buying ITM calls at the current price.
2) DTE would always be the following months expiration; at least 40 days or so to expiration. Current month degrades in premium too fast.
3) Look for the price momentum to continue within 1 to 5 days.
4) Risk rules set before entry, as always.
5) Profit contingent up the move within those 1 to 5 days (or longer depending on the rhythm of the stock) which includes weakness per the price action, volume, technicals...optimal holding time about 3 days. One down move can deflate the premium fast.
6) No buying outright two weeks before any earnings announcements (will straddle only) and no trades the week of interest rate decisions, jobs numbers, etc.

Why not just sell the calls when/where you think you would be taking profit on the purchased calls? I have condidered this but I don't want to lock up the account per the margin required to do this. Ex: selling 5 50 call options on a $50 stock would lock up too much margin and time.

Why not buy the stock and sell covered calls? Again, don't want to lock up all the account margin on a few stocks.

Just buying puts or calls per the stock allows me to be in several stocks at the same time...5 at the most.

I'm using TOS and their lookback or 'what if' historical trading analyzer is giving me some good results per what I am looking for. Scanning the end of day for the set-up and using the 30min chart for entry and exit.

Any thoughts?


Scanning - I use a group of about 25 stocks and etfs - I try to get them as uncorrelated as possible. I also look for high volume and stable, large percentage moves. High liquidity in weekly options.

Risk rules - the secret to success, along with backtesting!

I buy calls on instruments trending bullish, puts on those trending bearish using the same system, I only buy them 7 to 10 days out since my trade is expected to last only 2 - 4 days on average. I've found that a 54 delta works really well but backtesting using the 30 delta - tests show they are more volatile and the losers loose bigger - but the average monthly P&L is higher so we will see how it averages out - ask me a couple of months from now

I trade a technical system with specific rules for entry and exits - not based on profit or loss, nor do I pay attention to any news or earnings reports; if it isn't something I can consistently backtest its effects, it doesn't apply to my rules - this however works for my system and may or may not work for you.

I use a daily chart for entry & exits since my technicals are based on daily movements; I use a minute chart to get the best price on my options once it's time to actually enter or exit a position. I almost always use limit orders so I don't get a surprise on my fills - but lately I've had a couple of times when when my trade has hit its exit signal and its at the peak of a trading range - really has moved hard and fast and I want to exit quickly to capitalize on capturing as much of the move as possible so I have started using market orders to just testing the waters - I'm a little afraid of what kind of fill I would get with 200 contracts. - Maybe it won't be a big deal, only time will tell.

I'm totally with you on not selling calls - I don't want to worry about margin requirements or make things too complicated to manage. I frequently have 10 - 18 trades on at any given time and just managing those positions takes enough of my attention span. I believe that it is best to keep things as simple as possible. I find, after my partner and I review our trades at the end of the month, how easy it is to make mistakes on simple rules. We set our goals to execute our system as perfectly as possible since over time, it is a systematic approach that pays off for those of us who aren't blessed with the rare talent of intuition and trading by guts.

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