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How Much Should I Expect To Make A Year?

Posted by Pete Stolcers on June 17, 2006

Option Trading Question

Today Rich asks such a great question that I will post it all. “This is more trading goal oriented. I would like to setup goals to measure progress. Is this a good idea? What can be reasonably expected as far as a rate of return? I hear about these great trading systems that will make me a gazillion percent return. I've read articles about professional traders that try to beat the return on bonds or to generate 12% a year no matter what the markets do. These are very low returns compared to what the people trying to sell me their products claim. What would be considered a reasonable rate of return for somebody that is a "part-time trader" utilizing somewhat conservative stock/options trades? Should the goal be based off of the market's return or something more static like 3% a month? Personally I am not looking to hit a home run. I'm more of the slow and steady wins the race mentality. I am trying to be realistic and don't know at what rate of return can be considered realistically obtainable? Could this be something that you could write a piece on?"

Option Trading Answer

One of the first key phrases is “trading goal”. Your portfolio needs to have a diversified look and trading represents the speculative portion that takes greater risks and offers higher rewards. It is important that you are realistic. The answer lies in your risk profile.

I have three goals. My first is not to lose money. While this may sound ridiculous, we are talking about trading and losses are very real. I continually take money out so that I have to start from scratch. It keeps my ego in check and I’m more cautious than if I have a wad to throw around. If I start to draw down, I cut way back and pick my spots carefully. Remember, the market does go down. I won’t accept that as an excuse to lose money.

My second goal is to beat the S&P 500. If I can’t do that then I might as well put my money in the SPY and find another job. Considering that I don’t want to lose money even if the market is down, but I want to have at least the same upside, this goal is more ambitious than it sounds. To put it into perspective, any large fund would put billions into a program that could produce these results. My advantage is that I can move quickly in and out of positions and I can adjust my exposure. The more money you work with the more normalized your returns will eventually be.

My third goad is to make 25% a year. I have found that reaching for more opens me up to too much risk and it brings in too much volatility. There are years when I do better and that is a bonus. Given my past performance over many years I know this is attainable. I was up 10% going into May and it looked like a banner year. I carry a long/short portfolio and my shorts were outperforming my longs by a ratio of 3:1 when the market was making multi-year highs in March/April. I was able to unwind my positions and keep what I had made. I considered that a big victory.When you can weather a storm like that it sets up the rest of the year. I have found that my style generates small choppy returns - and then I go on a run. I may have two or three of those a year and that’s when I make my money.

To Richards point, there are many “snake oil salesmen” who are selling get rich schemes. They “cherry pick” their trades and numbers like 300% are tossed about like candy. They just want to sell you their crap for $3,0000. Before you sign up for their programs ask to see a 3-year and a 5-year end-of-month brokerage statement. If you find someone that will do it, let me know. I’ll take the seat next to you. I could learn from someone like that. If you asked that question you would hear, “I’m too busy teaching and I can’t watch my positions so I don’t trade or these are back tested results.” People that are greedy will line up for these programs. These commercials have the affect of setting up unrealistic expectations. People will also look at the hottest sectors and rationalize, “Why should I listen to someone who can only make 25% a year. I could have made 40% if I would have just invested in basic materials stocks.” We all know what’s happened to that sector in the last month.

Richard also asks about big professional traders who aim to make 12% a year no matter what. That is a fantastic return when you are moving large money. It is the hedge fund mentality and there goal is to reduce volatility through a variety of trading methods. What I do is similar, However, I’m not managing hundreds of millions of dollars so I can move quickly and produce higher results.

There are also Wall Street traders who make millions of dollars a year. Realize that they are working with an enormous capital base on a leveraged basis. These are the “Michael Jordans” of trading. There aren’t many of them and they had to prove themselves before they got their shot. I’m sure any of them would be elated to make 25% a year on their capital base.

As a trader you need to feel comfortable with the risks you are willing to take to generate the desired return. Aim too high and you run the risk of losing your money. As time elapses, you will know what to expect.

As for Rich, I think he has the right attitude. Look for consistency. IF YOU CAN TRADE BOTH SIDES OF THE MARKET, I think a 20% rate of return per year is attainable for a part-time trader who puts in 2 hours of research a day and does not take unnecessary risks. The problem is that most people only know how to be long. If you want to be a good trader you have to learn how to short.

If you want to rip on some of these “get rich” schemes you’ve seen or experienced, post a comment. It might help other traders.

Option Trading Comments

  • On 06/19, Ricky S. said:

    I got suckered into one of these programs. The name of the program is TEACH ME TO TRADE. It was a free class that I signed up for. Then you had to pay a little fee for the 2nd class. It was three days worth of what you could do and how much you could make in the market. Then they pitched the real classes that were priced at around THREE TO FOUR THOUSAND DOLLARS a piece. To me they just spoon feed you enough to make you really excited (GREED). I learned enough to loose alot of money. Now I know there is not a holy grail to trading. It is a learning process that takes time. So watch out for the get rich classes because they are the only ones that are getting rich.<br><br>Thanks,

  • On 02/26, Dubai said:

    Bravo, there is no such thing as a free lunch. People get scammed every single day and their own greed gets them into it.

  • On 03/07, BoundForHell said:

    I have been option trading for two years and lost all of my money, ( $60000 that I started with ) sure I had some fantastic returns and was up for a while, and dreamed of the big returns that would make me a millionaire.  I even started writing a book with my so called secrets, it all turned out to be beginners luck and then came the stark reality of trading and lost everything to mostly very bad trades, my timing was way off.  I was down to my last $500 just a few weeks ago and I have crawled back up to $12000.  Now after doing this for two years I realize that there is no fast track and Peter is absolutely correct there only a hand full out there that have had the good fortune of being at the right place at the right time, the rest are all “ SNAKE OIL SALESMEN” and they are the only ones getting rich.  For the rest of us it’s hard work and emotional abuse.

    Good trading everyone
    BoundForHell

  • On 03/11, NO LONGER A SUCER said:

    hi,
    I have been in numerous things to learn how to do a thing that is supposed to take me to the riches.  I have learn there is no such thing.  But what i can do is do the same thing that they are doing.  I can develop and market my own money machine.  I just take and learn the system and make it work for me. hahaha lol, sound bad. but every man for him self.

    sincerely,
    NO LONGER A SUCKER

  • On 03/11, Pete Stolcers said:

    The market is flooded with wanna be “gurus” who failed as traders and now want to teach others what they don’t know.

    That was one of my motivations for providing research. I want to be the guy people can count on.

    I have traded successfully as a professional for many years and it was my sole source of income.

    Learn, prove yourself and then if you want to teach, do it. Only about 50% of what you need to be successful can be taught. The other 50% comes from within. Dedication, patience, discipline, creativity, and greed are inherent traits.

    I’m not slamming you, I feel bad that you have been lead down the rags to riches road by others.

  • On 04/27, Pick a Trading Guru/System said:

    It seems that all trading systems that we receive via mail promise high returns. All have the same thing in mind, “To make money from the useless pamphlet/book” and sucker you in to buy a seminar or newsletter.

    These newsletters,seminars etc are really what they want you to buy because they generate revenue, often several thousand dollars. I have an idea why not offer a challenge to all these “Gurus” selling their highly touted trading systems through Tradewinds Publishing, to face off on CNBC and prove it?

    If their systems are as fool proof as they say, “85-90” percent winners, let them pick an average person off the street set them up with a 5-10k brokerage acct and lets see the results!

    I guarantee only a handfull will take this challenge, and here is the catch, they can only use the material that we get for let’s say $49-$95. This should once and for all settle the battle of the Trading Gurus and save us time and money which we don’t have.

  • On 04/27, Pete Stolcers said:

    Amen! I couln’t agree with you more.

    First, it is a great idea. Second, very few will do it. The guru image they have created would be lost overnight. If you find a challenge please let me know.

    I tried to get Mark Hulbert (third party) to rate my service and I sent him trade by trade results for over 8 months. He said he was too busy to include any new results. I decided to make my performance available to the public with links back to each original research report with analysis,dates, entry/exit points, and concluding commentary.

    In my Free Event I describe my systematic approach, I show it in action and then I reveal my current trades so that visitors can evaluate my analysis.

    As a newsletter writer, my best subscribers have been burned before and they do their due diligence before they sign up with OneOption. You need to be cautious and that is why I am very open about what I do.

    You sound like you have been burned. Attend my Live Event and I will show you around.

  • On 05/05, DonnaL said:

    Pete’s reports are awesome, well worth it!  Often I’m about to trade his recs because I learned from his webinar what to look for, and the report adds the confirmation I need to feel confident. Before I found this resource, I made a ton of mistakes in not setting stops quickly enough, but I have no problem taking losses early now, and I learned to relax more with back month options (thanks especially for that wisdom). This site is great; glad I found it in my first couple months of trading. You don’t need a magic formula to make money, just the ability to put your ego and greed aside. Here’s the the real magic formula: I’ve had more losers than winners, but the winners have been far bigger and I’m up 10% in a couple months.

  • On 06/28, darkwriter said:

    I am an options writer, writing OTM strikes on ultralong/ultrashort ETFs, very profitably on a rolling monthly basis. I choose my strikes based on margin utilisation returns, for example: selling 10 OTM SDS calls, 3 weeks to expiry, requires holding margin of say 8% of the received premium.

    My question is, are you aware of any academic research that has been done to determine which level OTM strikes generally expire OTM? Example: generally, ATM strikes, and 1/2/3 level OTM generally expire ITM (within weeks), however Far OTM, generally expire worthless.

    So I am interested in proper academic research that may have analysed these types of scenarios. Thanks.

  • On 06/30, Pete Stolcers said:

    You can feel like a genius with this strategy. There will be 2-3 instances where you have to make key decisions each year. how you react will determine if you make money. sometimes you have to buy the spreads back, sometimes leaving them on was the right move. You will go through prolonged periods where the market cooperates. However, all it takes is one major move to take it all away. Don’t be fooled into thinking you will adjust once the move starts. Stops aren’t the safeguard you think they are and huge overnight moves are a killer.

    I have found that selling condors that are 1 standard deviation OTM with a 5-point strike differential is the most efficient risk/reward strategy. 

    Read through my blogs and you will find that I am not a big fan of neutral trading strategies.

  • On 11/12, Brian said:

    I just want to make 50,000 dollars in a year or so. I’m hoping this is pretty small scale cash compared to what other people are thinking

  • On 11/12, Pete Stolcers said:

    It all depends on your risk tolerance, capital base and experience. If you have less than $50k to start with (100% return), that would be a very tall order. If you have $200k (25% return), that would be a reasonable goal with solid research and good risk management.

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