Watch HowardCohodas Trade Index Options Credit Spreads

At the end of every month I publish an equity chart for the stakeholders of my trading; myself, my wife, friends and family that I have taught and now my readers here.

Completed Iron Condor # 12 today.

Options involving three spreads will expire tomorrow. Must consider whether to close spreads or let expire.

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Nice bar chart.

Is this 40% growth of initial equity you are showing or is the percentage based on amount risked.

Also - we saw a $160 win based on a $2500 risk. Let's say I wanted to follow this method as a way to make a living. Let's also say I wanted to earn $8000 per month. By this measure, would we need to risk $125,000 per month in order to make the $8000 ?

What account size would you recommend in order to make a living this way ? What's your expectation of maximum losing trades in a row ?

Also - as you are trading spreads - when you are risking $2500 to make the $160 - what is your brokers opinion of your risk? I know some brokers are reasonably dumb when it comes to figuring out margin requirements on spreads.

The chart is on account equity and I am never "all in." How much I reserve is not set in stone, but is about 10%-20% of the account size. On my to-do list is to look at this more analytically.

By using the number of calendar days since the account was established I am operating a bit above a 10.5% growth per month. I have not yet suffered a serious loss, so that bounds the upper end.

Just looking at one spread only tells part of the picture. Additional income can be earned by forming an Iron Condor without committing additional margin. With my methods, an Iron Condor is not always formed.

Part of individualizing my methods for another trader is to determine the trader's risk tolerance. This then determines an upper bound on the credit one can expect at the time the spread is entered.

All this to get around to answering your question. If we assume that 10.5% is an upper bound and that I will suffer a loss of around 20% of what is at risk once in 10 months. That leaves an expected rate of a little more than 7.5% per month. Rounding here and rounding there, I get about $110,000 to earn $8,000 per month.

OK - so for each $8000 return we need $110,000 in the market - but as our win:loss ratio would be $8000:$110,000 - we'd need a larger account than just $110,000 as one loss would wipe us out.

As you say, you are never all in - only 80-90% in the market.

So - how large an account would we need here ? We can re-build the capital from a loss in approximately 14 months but in that 14 months, we'd need to not spend any money as it needs to go to re-building capital.

Obviously as the required account size grows, then the percentage return on the account would inevitably fall.

From the discussions so far, I would guess your probability calculation shows you that 2 consecutive losses would be a rare event. What's your maximum expectation of consecutive losses ?

Howard's chart looks just like the beginning of the NAV of LTCM at the beginning of the book "When genius failed".

Just to review, the $110,000 account size to earn $8,000 per month is based on the following:

1. 10.5% account size growth in successful months
2. 1 in 10 chance of an unsuccessful month
3. 30% loss of entire account in an unsuccessful month (more on this later)
4. No estimate of the probability of consecutive monthly losses

The 10.5% upper bound is based on my actual performance. My testing results show a higher return is possible. Since I'm in preproduction (small money) in some areas, the actual results may be somewhat diminished. And four months is not yet statistically significant.

The 1 in 10 chance for an unsuccessful month is below what I saw in testing, however it is more reflective in the Probability of Touching level I choose. I choose the more conservative number in my estimates to account for possible failures not anticipated.

The choice of 30% loss of the entire account rather than the funds at risk actually assumes two consecutive months of failure. That is because I generally enter a trade right after the expiration of current months options when the funds quarantined by margin requirements become available. The new spread is entered around 60 days before expiration in order to catch the time-value decay curve before the knee. Thus I am leapfrogging the following month's options, which I'm already in, for the one after that. (Gosh, that's a messy explanation. I'll have to work on making easier to understand)

I feel this is an overly conservative approach to estimating draw-down as I never saw two consecutive monthly losses in testing, but I like to stay on the safe side of things when discussing the possibilities.

I know that I did not answer some of your questions directly because I did not attack the problems as you stated them. If you feel more explanation is needed, ask away, and I'll do my best.

Part of the reason I choose to expose myself in such depth is to avoid such disasters by having those with wisdom beyond mine continue to ask questions that force me to think deeper and be more cautious.

There is a period of time in the training of pilots after they begin to feel comfortable at the controls and have made a few successful landings that they are the most dangerous. We used to call this the "they think they can fly the box it came in" syndrome. Those destined to be good pilots soon recognize that they have so much more to learn. I aspire to be a good pilot (trader).

If my becoming a good trader is possible, I believe this thread in particular and this forum in general will help me do it.