Realistic Trading Goals

In an online forum I frequent, one poster noted that he had been able to double his money for two consecutive months and was wondering how to accomplish that feat every month.

He also noted that if he could do that 10 to 12 more times, he could retire.

I don't know which of his comments is more 'out of touch' with reality.

If you begin with only $1,000, and double it 12 times, you would have well over $4 million dollars.  Not considering whether that's enough to retire, it's difficult to believe anyone would consider taking the risk involved with attempting to double the value of an investment account in a single month.  And if successful, continue to take that risk again and again.

I don't know if this question comes from someone who wants to show off that he's done well (probably by being naked long calls in a very bullish market environment), or someone who is naive enough to believe that what he is asking is possible.

The reply to his first question is obviously: "Yes."  It's possible,  but the risk required to generate 10% per month is pretty substantial – imagine what it would be if trying to earn 100%.  The investor would have to buy an ever-increasing number of options every month – and never be wrong about market direction.  And that includes never incurring a dull month in which the markets held steady and the account moved to zero as the options became worthless.

Alternatively, he could sell enough options to collect premium that equals the current value of his account – and hope they all expire worthless.

Neither method can work month after month.  It's always possible that a long shot will win (2009 Kentucky Derby, for example), and that someone can do extremely well over a short period of time, but it's not likely that it can be done again and again.

Mine That Bird wins at > 50 to 1

Why do I bring up these rather impractical questions by someone I don't know?  Because I believe it's essential to trade with your head firmly situated on your shoulders and to recognize that although huge returns are possible, trying to earn those returns is a big gamble.  When it comes to using options for investment purposes, it's a good idea to have more modest goals – achievable goals – that build wealth over time, and not immediately. 

Options were designed to reduce risk, and I trust readers of this blog are using options just that way.

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