Is 5% a Good Return For Options Trades? (2024)

Well, every trade should be put in context. Before evaluating a trade (or an options strategy), the following questions should be asked and answered:

  1. What is the holding period of the strategy?
  2. What is the maximum risk?
  3. What is the profit potential?
  4. What is the average return?
  5. What is the winning ratio?

Why holding period is important? Well, making 5% in one week is not the same as making 5% in six months. In the first case we are talking about 250% annualized return. In the second case, 10%. See the difference.


Maximum risk is important because it doesn't make sense to aim for 5% gain if your strategy can lose 50-100%. For example,when you are trading a directional strategy, and the stock gaps against you, the losses can be catastrophic. Since the risk is high, you should aim for higher return to compensate for the risk.

However, if your maximum risk is limited, you can aim for lower return and still get excellent overall performance.

Lets examine our pre-earnings straddles as an example.

As a reminder, along straddle option strategy isvegapositive,gammapositive andthetanegative trade. Itworks based on the premise that both call and put options have unlimited profit potential but limited loss.

Straddles are a good strategy to pursue if you believe that a stock's price will move significantly, but unsure as to which direction. Another case is if you believe that Implied Volatilityof the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article

Exploiting Earnings Associated Rising Volatility. IV usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. This is one of my favorite strategies that we use in ourSteadyOptionsmodel portfolio.

This is how the P/L chart looks like:

Is 5% a Good Return For Options Trades? (1)

How We Trade Straddle Option Strategyprovides a full explanation of the strategy.

Lets take a look at 2022statistics for this strategy:

  • Number of trades: 148
  • Number of winners: 103
  • Number of losers: 40
  • Winning ratio: 72.5%
  • Average return per trade: 4.9%
  • Average return per winning trade: 8.7%
  • Average return per losing trade: -10.2%
  • Average holding period: 7.2 days

Lets do a quick math. If you can do 10 trades per month, each trade producing 5% gain on average and 10% allocation per trade, your monthly return is 5% on the whole portfolio. That's 60% non compounded annual return, with minimal risk.

To answer the original question: for a strategy that has 70%+ winning ratio and loses on average 10% on losing trades, with average holding period of one week, 5% is an EXCELLENT return. In fact, I would consider it as Close to the Holy Grail as You Can Get.

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Is 5% a Good Return For Options Trades? (2024)

FAQs

What is the average return on options trading? ›

Average return per trade: 4.9% Average return per winning trade: 8.7% Average return per losing trade: -10.2%

What is a good return for selling options? ›

Selling Options for Income. Selling put options for income can return 48% annually (4% per month) for an average investor or trader.

What is a good probability of profit on options? ›

If you were to write 10 call option contracts, your maximum profit would be the amount of the premium income, or $500, while your loss is theoretically unlimited. However, the odds of the options trade being profitable are very much in your favor, at 75%.

How much return is good for a trader? ›

Industry Benchmark in Trading

That means that if he had deployed ₹1 crore of capital on trading, he would've made around ₹70 lakhs that year. The top traders in India make nearly 40-70% returns on their capital every year. So the industry benchmark of 40-60% returns is what you should aim to generate through trading.

How much can you realistically make with options? ›

How much money can you make trading options? It's realistic to make anywhere between 10% – $50% or more per trade. If you have at least $10,000 or more in an account, you could make $250 – $1,000 or more trading them. It's important to manage your risk properly by trading them.

How many options traders are profitable? ›

The success rate for investors who trade options can range from 50 to 75%. There are various strategies that investors employ to aim for success.

How do you never lose in option trading? ›

The option sellers stand a greater risk of losses when there is heavy movement in the market. So, if you have sold options, then always try to hedge your position to avoid such losses. For example, if you have sold at the money calls/puts, then try to buy far out of the money calls/puts to hedge your position.

Can you live off selling options? ›

If you're wondering if I can make a living trading options, you can trade options full-time and make a comfortable living. But first, you must know how to trade put and call options properly. Learning technical analysis is key if you're looking to enter the wonderful world of trading options for a living.

Can you become a millionaire selling options? ›

In fact, if you are not careful, you are far more likely to go broke trading options than you are to get rich. There is a very good reason that the U.S Securities and Exchange Commission has qualification rules in place for investors who want to trade options as there is a lot of risk involved.

Which option strategy is most profitable? ›

1. Bull Call Spread. A bull call spread strategy is driven by a bullish outlook. It involves purchasing a call option with a lower strike price while concurrently selling one with a higher strike price, positioning you to profit from an anticipated gradual increase in the stock's value.

What are the odds of winning options selling? ›

Once considered a niche segment of the investing world, options trading has now gone mainstream. With little knowledge on the best strategies, you can use options to work the odds in your favor and make trades that have up to an 80% probability of success.

Why do people lose money in option trading? ›

Lack of price movement (low volatility): Options offer leverage, so even small price changes in the underlying asset can result in significant gains or losses. If the asset's price stays stable or changes very little, options buyers might lose money, especially if they have paid a premium for the options.

Is 5% a good return? ›

General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.

What is the 3 5 7 rule in trading? ›

What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.

What is a realistic day trading profit? ›

A typical day trading profit per day is between 0.033 and 0.13 percent. This corresponds to a monthly profit of between 1 and 10 percent for successful day traders. However, only a few traders are successful in the long term - most make losses.

How much does the average option trader make? ›

The average options trader salary in the United States is $110,139. Options trader salaries typically range between $65,000 and $185,000 yearly.

Is options trading really worth it? ›

Trading options offers a number of benefits for an active trader: Options can offer high returns and do so over a short period, allowing you to multiply your money quickly if your wager is right. With options, it can cost less to get the same exposure to a stock's price movement than it does to buy the stock directly.

What is a good amount to start options trading? ›

In options trading, only using small amounts of money can be a hindrance as many brokers may restrict what you can do. It is highly advisable that at a minimum, one should be putting in $5,000-10,000 for starting options trading in order to make any profits.

Is 500 enough to trade options? ›

Yes, you can trade options for only $500, but it is important to note that options trading involves significant risks and may not be suitable for everyone. Online brokers like Robinhood and TD Ameritrade offer commission-free options trading and allow you to start trading with no minimum deposit.

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