Setting My Options Trading Goals

I have updated this article today (20 Nov 22) since I updated my financial planning.

In addition to my retirement funds and other assets, I started in 2021 to do some investing and options trading. I want to raise additional income, especially for the period after my retirement. To do this correctly, I have to determine my goals.

In 2021, I began with an initial investment in stocks that ended at €11,850. This amount included €2,100 crypto investments using mainly Coinbase, Binance, Bybit, Pancakeswap. They have been dramatically reduced in the past few months due to the crypto crash. But I will continue crypto trading; even as it, for now, still looks like a casino and Wild West.

For now, I will continue to keep my other trading accounts and retirement funds for long-term investments.

However, my real focus most of my time will be on options trading.

So this year I have already moved $6,000 from my stock account to fund my tastyworks account. I have given myself some time until after the summer holidays to experiment with no more than $2,000 of this amount.

Moreover, I also need the time to set up my trading plan and all my trading tools like journals, Excel sheets, websites, and charts.

I will top up my account to $9,000 or more in October to allow me to trade with more underlyings and start tracking my trading. [note: actually, I topped it up to $11,000].

In the following paragraphs, I will describe my options trading goals.

Options trading goals: sailing the oceans
One of my goals is to do more sailing under blue skies!

Trading budget goal

The amount I will deposit for trading for 2022 will go up to $9,000 [note: $11,000 now]. This amount I can afford to lose this and I will not depend on this money during the year.

Generally, I expect and have already experienced that 2022 to be a rough ride. I already had to adjust my options trading goals and options strategies to all the events happening in 2022:

  1. The Ukraine war is already affecting 2022’s broader market
  2. There already have been corrections (>10%), and we have officially entered into a bear market(>20% decline)
  3. The US Federal Discount Interest Rates increased
  4. The US mid-term elections may also affect US global stock markets.

However, I am hoping the rebound will be relatively fast.

My options trading goals and rules

The reason I have started to trade options is to find out whether I can build up extra income of on average $2.000 per month from options trading on top of my retirement funds and pensions.

I learned about options trading in the first months of this year and started with my first options trades in April of this year. Immediately I was punished for not having a clear plan, not following the rules, and in general, a total lack of discipline. Up to September, I lost up to $1,500.00. Learning the hard way!

If I would liquidate all my positions today, I would already be 24% down. And that in 4 months!

The first months have also given me a more realistic look at how much you can actually earn with options trading. I am sure along the way, and I will need to revisit my goals and plans. [Note: this is what I did on 20 Nov 2022]

Main goal: average monthly option income of $2,000 per month in 2027

To supplement my retirement and other funds I aim to generate $2,000 in extra income by the time I will retire, which is about five years from now. I started with $6,000 in my tastyworks account.

On this website, I will keep track of the progress made to reach this goal from 1 September 2022.

I want to start paying myself during the year 2027 a total of $24,000 per year. [Note: this will now be 2028; see this post]

See for the update here

The drivers of my profits are marked in red, and are:

  • Return on Risk/Capital per position should be at least 35% [note: as per 20 Nov 22: 40%]
  • The average profit achieved should be at least 60%
  • The Probability of Profit per trade should be at least 70%
  • Max loss should be no higher than 50% of the premium/max profit [note: I increased this to 75%]

Every quarter, I will adjust the forecast based on actuals and monitor whether the above percentages are realistic and achieved.

For instance, if I see the average ratio between wins and losses deteriorates, or my achieved profits are lower, or losses are, on average, higher, which is structural, I will have to adjust the input.

If the ratio of wins versus losses drops to 2:3, I could try to minimize the max loss I take (halving it to 50%).

If the trades, on average, take longer than 4 weeks and, therefore, the number of trades per month decreases over the year, I need to see how I can up my win rate to compensate.

As the last resort, I will have to add cash to my account to achieve my goals.

The Excel sheets show me that the following inputs are the drivers of the results (in order of importance):

  1. A win versus loss ratio: I have set that at 7:3
  2. Average profit per trade: I have set that at 50% (based on a P50 > 80%)
  3. The average duration of trade: I am calculating 4 weeks per trade based on 45 DTE entry and 21 DTE exit

5% of Net Liq position size may be slightly too high from a risk management perspective, and I should downsize the risk per trade to a max of 3% of Net Liq per trade [note: it is 4% no]. I will use the VIX-based position sizing guidelines I found in this book by Tastyworks author Julia Spina.

The Lucky Investor's Guide to Option Trading by Julia Spina

Going down to 3% would mean I would have to increase trades from 10 to 17, and this will mean portfolio management will demand more time and probably be more complex. So I want to start with at least 10. Of course, when and where possible, I can always decide to increase the number of positions open (as long as I don’t go beyond the 50% portfolio value barrier I have set up). [Note: the maximum portfolio amount is now set at 60%

Also, position sizes below $300 (3% x $9.000) may yield too few opportunities and too low premiums too low to make progress. So I can better start reducing from 5% to 3% when my Net Liq has considerably grown [note: 4% now].

Year 2022 Goal: Starting with $9,000 in October

  • I started with $6,000 in April 2022
  • I will start tracking on 1 September 2022 and I will increase my net liq to $9.000 [note: $11,000 now] in October
  • On Dec 31, 2022, my trading account’s balance should have around $1,000 more than when I started in July 2022: so a total net liquidity value of $10,000 (‘Net Liq‘) [note: aim is now $12,350]

Given my rather poor start with my first options trades, I may have to replenish my account at the end of the year to reach the required NetLiq value of $10,000. [Note: this is still valid: I am still $2,700 away from reaching may latest target]

Monthly Goal 2022

  • In 2022, I will trade not less than 10 contracts active per month [note: this has been increased to 15]
  • Within a month, I should have filled up enough positions to reach max  trade risk (at first max 50% of portfolio Net Liq) [note; this has proven to be very difficult and is still not achieved]
  • Mostly I will trade vertical (credit) spreads, iron condors (defined risk) and to a lesser degree staddles or strangles
  • Entry around 30 (credit)  –  60 days (debit/iron condors)
  • So each trade will be on average 4 weeks in play: between 3+ weeks for credit spreads and sometimes (not more than) up to 7 weeks for debit spreads.
  • I will also start experimenting with (more risky) earnings trades, but this should be at a very low percentage of my total portfolio for options trading.

Weekly Goal: USD 250 per week

  • Start with 2 or 3 Vertical Bull or Bear Spreads and Iron Condors per week to reach at least 10 contracts per month
  • Once per month, an earnings (calendar spread) or straddle/strangle trade
  • Max risk: per trade max loss starting with a max of 5% of Net Liq (=$450) [note: it is 4% but amount is the same due to the largest deposit I made]
  • POP: 70%
  • Trade mostly on Tuesday, and Thursday
  • Wait until 10 AM (so don’t trade immediately after the bell), and no trades after 9 pm (so just before the end bell)
  • The anticipated trade profit of the low-risk positions I trade must come with an average gain of about 40% of max profit (40 % ROR/ROC), minus fees per contract.

Rules for the remainder of 2022

  • At any time max of 50% of the Net Liq of my portfolio will be at risk, so starting with around $4,500 max at risk [note; raised to 60%]
  • Max risk of loss per trade will not be higher than 5% of net liq = $450 [note: see above: 4% $450]
  • The ratio of max loss versus max profit at the set-up of a credit spread trade should be no more than 2:1 (about 65%: 35%, s a 2:1 ‘risk-reward ratio’)
  • PoP (Probability of Profit): close to at least 70%
  • P50 (probability you will reach at least 50% profit): close to at least 80%
  • Target average profit overall is at least 50% per trade
  • I will close, roll, or (‘early’) take profit per trade at 50% at 21 days to expiry [note: raised to 75%]
  • I will never let a trade come to an assignment

Probability of Profit (POP): POP stands for the probability of profit. POP is the probability of making at least $0.01 on the trade at expiration. For trades performed at a credit, it’s the probability of the break-even price expiring out-of-the-money. For trades performed at a debit, it’s the probability of the break-even price expiring in-the-money. Source: tastyworks

As a rule, I want my P50 (probability of 50% profit) to be at least 80% to improve my chances of achieving an average of at least 50% profit for my winning trades.

P50: P50 is the probability of reaching 50% of max profit before expiration. It is calculated by taking a trade, running it through a Monte-Carlo style simulation, and calculating the theoretical probability that your position will reach a 50% profit over 10,000 occurrences. Source: tastyworks

Therefore,  as an example, if 70% of the time, I earn at least 35.5% on a max of $450 (= $150), and conversely 30% of the time I will lose an average of 65 % of $450 ($300), and I can have max 10 trades active (= $4,500/450), then over such 10 trades foreseen, a, I should receive $1,050 in premiums ($150 x 7) but lose $900 ($300 x 3).

So I earn $150 per month. However, my exit rules also dictate that I will ‘early take’ profit at 50%, so I would only be earning $525 while losing $900, so I would be earning nothing and even losing money $375 per month.

So, another exit rule (at 21 DTE) has to be that I will take a loss if the loss reaches 100% of the premium. I will not work with automatic stop losses using the platform but track this separately (so-called ‘mental loss’)

In a future post, I will go into more detail about which options trading market indicators and technical analysis I use to establish what trades to do.

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