Return on Options?

Question

What is a good/decent rate of return to shoot for each month if i am selling equity options on a month to month basis?

Answer 1

Before anyone can give an intelligent answer to that question you have to define how you are going to calculate the return.

For example, assume a stock is at $55.00 and you sell a put with a strike of $55.00 for $5.00 and it expires worthless. Also assume your broker required $1,000 margin for the trade.

Andi might consider the return to be 100% of the opening transaction price.

Betty might consider the return to be 10% of the amount of money at risk.

Chuck might consider the return to be 50% of the margin required.

You also need to decide if you are going to include interest earned on cash in your calculation and, if so, how much cash. Andi might consider the interest on the option premium ($500), Bety might consider interest on the price of the stock plus the premium ($6,000) and Chuck might consider the return on the margin required plus the option premium ($1,500).

You also need to understand that if you a looking at a monthly return, the higher you set your target the more risk you will be taking, and as a result you will have more months where you have a loss instead of a profit. It is quite likely your annual return will be similar, and possibly lower, if you choose a higher monthly target.

Addendum

When I first answered I did not give you any numbers even though you explicitly asked for numbers. While I still cannot tell you what you numbers you should shoot for, I can pass on some of my recent trades so you can see what those numbers were.

I'll start with a simple diagonal spread opened 3/1/07.

I opened the following spread:

Long 5 Jan 08 $80 puts at $18.60 = $9,300
Short 5 Apr. $62.50 puts at $2.45 = $1,225

Total cost = maximum risk = $8,075

If assigned on the short puts, and I exercise the long puts, I will have a profit, before costs, of

(($80.00 - $62.50) x 5) - $8,075 = $675.

That would be a return of 8.36% in less than two months.

For more information on this spread see

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?m=tm&bn=4686677%23optiontradestraderecommendations&tid=3274&mid=3274&tof=19&frt=2

The other spread I will share is a little more convoluted. It was actually an adjustment to an existing position, but I will treat it as if it was a stand-alone spread.

Less than two weeks before March expiration I bought 20 August $20 BSX puts for $5.00 each and sold 20 March $15 BSX puts for $0.15 each. That made the total cost of the spread

($5.00 - $0.15) x 2,000 = $9,700

If assigned on the short puts and I had exercised the long puts that would make my profit

$300 / $9,700 = 3.1%

As it turned out, on the Friday before expiration the stock closed a little below $15 and I was assigned, but Monday the stock rose to over $15. I sold the stock for $15.06 per share, giving me a profit of

($0.21 x 2,000) / $9,700 = 4.3%

I then immediately sold 20 April $15 BSX puts for $0.50. If I am assigned on those puts and I exercise my long puts, my profit will be

($0.50 x 2,000) / $9,700 = 10.3%

Of course, if BSX is between $15.00 and $15.50 at expiry I will have a smaller profit, and if it is above $15.50 I will have a loss unless I successfully adjust my position.

Obviously I did not include transaction and carrying costs in these calculations.

I hope seeing some numbers helps you somewhat, even if I could not answer the question directly.

Answer 2

Ultimately if you're going through the trouble of managing your own money instead of just indexing it you want your investments as a whole to outperform the market (ie however much you'd get if you just dumped the cash into an S&P 500 index fund and went and did something else). Writing options on stock you already own can certainly be a good way to stick a little extra cash into your pockets without taking outrageous risks, but if you find after a while that you're making less cash for some reaon than you would simply by owning the shares then you might want to get out.

Answer 3

From what I read, truly dedicated option traders are working towards 5-10% per month returns. Doesn't always happen, but that is the goal.

I am using aggressive covered call trades and trying to make 4-5% per month. I lost 10% when the market dropped last month and am just making it up now, so I am back to where I started the year. I blog my trading at:

http://coveredcall.wordpress.com

Answer 4

Why on earth did you replace the reveal on your man or woman?? Did you make specific all of the wires are the place they might desire to be? What did you turn the reveal with? An eBay china reveal? Or a real iPod touch 2G (or despite type) reveal? As for exiting apps, no. There are long a tedious strategies around this (jointly with turning off your iPod and restarting) yet it truly is a soreness to do every time you go with to alter apps.

Answer 5

Since you're taking a lot of risk, I'd say you should expect at least 20 percent annually, otherwise it's not worth your effort and risk.

Congrats if you can manage it.

Answer 6

16% and up.