Do you make enough money on the months in which you don't lose money to offset the losing
months? I had two very bad months and it's made me lack the confidence to trade.
Also what kind of annual returns do you shoot for. I'm happy
with around 30-40%
It good to hear you say 'there's going to be lots of profits.' That gives me some faith as I really got shaken by my big loss in
Jan '08. I still don't have strong belief that I can make good money doing
this [buying iron condors]….especially with many experts making negative comments on premium
selling. You know the guys I'm talking about. They give good advice but
just keep hammering into us that we're gonna get killed if we sell
premium. Do your losses make you a little gun shy?
Lots of ground to cover. I'll try to be succinct.
1) Yes, profits outweigh losses.
2) I don't have a target annual return. I try to manage my positions to provide a 'good' return (that definition is different for each trader) – while keeping risk at an acceptable level.
3) 30%+ per year is a very good return for anyone. Sure, you can try to earn more, but would you be happy with the increased level of risk? Are you aware that making 30% per year doubles your money about once every 2 1/2 years? That means after 10 years, $1,000 becomes $16,000. One quarter million after 20 years and $4 million after 30 years. Do you really need to do better than that?
4) Yes, I believe that most iron condor buyers make money much more often than they lose. That's because most adopt a strategy of selling options that are far OTM. Whether that's a good idea or not is beyond today's post (but I think it's not as good of an idea as it appears to be). But when your chances of success in any given month is 80 to 90%, you know you will have lots more winning months than losing months. Your task is being certain that those losing months do not wipe out years of gains.
5) Most premium sellers do eventually get hurt. There are two main reasons for this:
Many sell naked options. That gives them positions with unlimited losses.
Most who sell premium think it's an easy road to success, and get lazy.
They do NOT exercise good risk management skills. That means they take substantial losses far too often. When that happens, success is unachievable.
6) My losses disappoint me, but I know it's part of the game. Large losses are very disturbing because it means I did something wrong. Perhaps waiting too long before taking action, but more likely because I bought too many iron condors. I do not lose confidence because I know I understand how to make money by using an iron condor strategy. If I have the discipline to adhere to the instructions of my risk manager (that's me), I will succeed. If I do not believe the advice my risk manage offers, I will not succeed.
As to your lack of confidence, all I can do is ask: does your risk manager know what he is doing? Do you trust him?
Some strategies are not suitable for certain personalities. Worse than
that, trading is not for everyone. And if you absolutely HATE taking
some risk, it's impossible to succeed. If you gamble and take too much
risk, you will probably lose also. It's not a simple path.
If you can't be a trader, it's best to recognize that at some point. Being a successful investor is also rewarding.
up – at least not now. Perhaps a different option strategy is more
suitable for you, or perhaps you can do better with iron condors. Reduce your size and practice risk management.
Bottom line advice:
Your primary goal is staying the game and not going broke
Your secondary goal is making money.
Your tertiary goal is becoming wealthy.
DO NOT forget the importance of this sequence.