# How Much Money Can I Make Trading Options?

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2019-03-18 23:24

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Hi Kirk, if you destinate 25% of your portfolio to trade in an options margin account, do you make arround 10% a year of your whole portfolio or 10% of your 25% in your options account? thanks in advance

Whole portfolio

This along with all the other video's from OPTIONALPHA.COM ARE MUCH MORE THAN YOU WOULD EXPECT.... THANK YOU.....

Very welcome!

thanx for the lesson ..really helped me alot

Love the video! Just to make sure I get my math right. At 20:15 the annual return is displayed at 11.71%. When I pull out my calculator, 0.12% x 365 x 25% equals to 10.95%. Not a huge difference, what I'm really worried is if I did not understand the math :) Would be great if you can elaborate and thank you for a great tutorial!

Found my own answer! It was the rounding. The ROC is 0.128333..% in reality, rather than the simplified number displayed which is 0.12%. So the math works out. I'm not deleting the comment for other folks who may have the same question. Thanks for keeping things simple for all to understand :)

You say that you ask people, do you want high profit or high roi...Shouldn't you instead be asking them what is your brokerage fee for each trade? since really roi is what matters overall, you could figure out which would be a higher profit by comparing spread vs naked by including commissions, to get comparable roi's.

Yep but commissions vary and everyone should account for those for themselves.

WOW!!! Thanks so much Kirk, this video is amazing!!! Thanks for all the tips and strategies :) I have a question, which platform are you using or how can I find a free options chains with Probability ITM ? Mine doesn't have that tool and I can't find any on the web. Can you please share a link? Cheers!!!

Quite nice. This is better than the mentors that I paid money for.

Fantastic staff !

You say "margin" quite a few times. Margin to me is a loan from my broker so I can purchase a position. Being it is a loan, it comes with interest. If it's margin that you withdraw from your account, I think I would understand your explanations better.  Very good video. Thank you

Gotcha yeah just to clarify - when selling options you just put money on "reserve" to cover the loss and no interest is charged.

Just awesome

Kirk I love the videos but can you explain how if your shooting for 70% success and if you are risking \$162 for a max profit of \$40, can you tell me how that would be profitable if I run this same trade 10 times and win 7 times my profit would about \$280(7x\$40) but if I lose the other 3 it would be negative \$486(3x\$162), or are we taking into account a stop loss before we hit the max risk?

Hello Kirk! I'm new to trading options just learning as much as I can before I get my feet wet! What platform or where do I go to see the big chart where you can search at the top left and it shows the put on the right and call on left shows the strike prices etc.

We use thinkorswim: https://optionalpha.com/tos

Is the price table that you show at 16:00 generated in Thinkorswim? Thanks

Ok, what is the difference in Implied Volatility, and Volatility, do you ever use stochastics as an indicator !

Implied is the market expectation of future volatility. Volatility (or historical volatility) is what actually occurred. We backtested stochastics and the results are here: https://optionalpha.com/signals

Hello: Excellent Video, Question, what control IV, the market as a whole or the sector the stock is in ? Why is one stock at 46 IV and the other is at 70 IV, what controls this ? Thanks,

Great questions - market participants control it - how active and aggressive (or not) people are buying/selling options.

if i invest \$5000 and my return will be 10% per year that is \$500 per year.??? is it worth?

If you can do that year after year - YES!

Just wondering how you get to pay only 1.25 dollars per trade.

How are you quantifying your risk on each trade? How do I know what a 2% position is for example? Thanks

Option Alpha - Ok, thanks again. Happy new year.

Ah yeah forgot to mention that so my apologies - in those cases you use the initial margin required to hold the position.

Option Alpha Appreciate the quick response. What about trades that don't have a well defined loss - that have massive potential downsides, like selling naked puts for example. Stocks can theoretically go to zero. Do you use a probability based approach in that scenario - or would you literally use max loss? Thank you.

You base it on the max loss per trade. So if I could lose say \$600 on a trade, I'd want that \$600 to be less than 5% of my account balance.

Hello Kirk, I have a question on why you are taking the selling positions of the options.. what difference does it make? At first I thought it was because of the probability is higher but looking down the chart on the screen the probability is high. Maybe I am missing something..

We sell options because of the over-expectation of implied volatility: https://optionalpha.com/members/tracks/beginner-course/whats-our-edge-trading-options

whats the reasoning behind only trading 25% of your account? If you have an 80% chance to win wouldn't you make more money trading all of it? or is that remaining 75% what you have to put up for risk?

Yep - see our podcast on how to get it reduced: https://optionalpha.com/show-020-how-i-negotiated-a-17-reduction-in-my-trading-commissions-17421.html

You could go slightly higher with defined risk trades because everything is risk-defined - yes.

also I see you use TOS but only pay \$1.25/contract???

Does this still apply if I'm only making trades with defined risk? The videos and reply are much appreciated thank you!

Because you always need to have dry powder to keep the lights on in black swan events. Plus you don't need to trade the full account to generate a decent return so why over leverage.

i have enjoy this video and i have learned quit a lot

Hi, really good video, so if ther is a 100k account, and you invested 25%.. which is 25k.. is 25k is going to be used in margin in single trade? or 25k is the target premium you want to collect in 1 year? thank youu....

Correct - if you allocated 25% then at all times (or on average) you'd like to have 25% of your account allocated for margin for all positions.

Option Alpha so it will be for the margin for all assets? not the target premium collected in 1 year?

\$25k will be used for all positons (not just a single position)

All i can say is WOW. You have truly cut the bull and just talked sense into me. I have been educating myself by watching videos and reading materials in this for past a year now. But this video alone is worth money. Thank You!!!!!!

Some of the best options teaching I have seen!!! I love the math!!! I wish I saw this a year or two ago...always learning!!!

Hi Kirk, Question... if you have say a 100k account, and you're investing 25k in options (per your example), is there a reason you need to leave 75k in cash in your investment account? I mean, stated another way, could you put that 75k into a home instead, and then what you actually have is 25k in your investment account with 100% invested in options... ? Basically, I'm trying to see if there is a necessity to have 75k in cash in your account basically not earning anything (other than a small % interest from your broker). Thanks. Love your videos! Likely joining soon.

Sure technically you can be it anywhere you'd like BUT the reason we leave it in cash in our account is because it's there to cover margin expansion when and if black swan events happen - also it's always a good idea to have some extra trading cash to make adjustments or add new positions when necessary.

Great video guys, thanks so much.

Hi Kirk, I have noticed that you can put on both legs of an iron condor with each leg at an 80% probability but when the legs are combined the overall probability is always less like 72%. Can you explain why?

Because you have to then determine the probability of the stock ending between the strike prices. Single legs have probability of the stock either higher or lower than just that strike price.

In this example how much would you have lost if the market did actually go below 102 (even though the probability was low that it would) - how much would have been lost?

Keiran Kainth Max loss for a PUT seller occurs when (theoretically) the underlying stock / index goes to zero. In this case the max loss is (102-0)*100= \$10,200 - \$172 the premium the seller collected = \$10,028 Of course, the stock can go to zero only if there is a fraud or scandal or something real catastrophic event. I have seen a move from prev close of 180/- to open of 3/- at the opening bell when overnight the CEO confessed to cooking company accounts for years (not in the US). Typically value investors jump in and the stock recovers. This is the theoretical max value as the stock can not go below zero. There is no such theoretical max value for loss of a CALL writer as (again) in theory the underlying stock/index can go to infinity :-) Hope this helps.

Since this was a naked option it would have depended on how far below 102 it went. If it went to 100 you would have lost approx \$200

Hi Kirk, is this in any of your pdf files on the website?

Not currently but we'll be adding them in the near future.

I like how u explain the way you trade on these vids. Its very understandable. You have a teachers way about u. Started paper trading hope to progress.

Thanks for the help.

He IS excellent. Check out the interview he did on Chat With Traders. It's a good idea to paper trade, but honestly, don't paper trade for TOO long... you can get into some less than good habits because there's always the knowledge in the back of your mind that you're not actually risking anything. Learn the mechanics, learn order types, then jump in the pool :)

Hey Kirk, love the channel, love what you're doing. I have a couple of questions. Not to poke holes into the analysis, but what about the effects of implied volatility when selling premium? How does that affect your win amount and win/loss percentage (especially in a low IV period)? Also, when you do take a loss, are you assuming a full loss for defined risk trades, and how do you include the loss from undefined risk trades such as selling naked puts, etc? Any insight on these questions would be great. Other than that, this is by far the best options channel I have found. Thanks again. - Jon

Glad it's helping Jon and thanks for the comments. IV is the key to everything selling options. Here's some more training on both of these questions that we covered in our free courses: https://optionalpha.com/members/tracks

Thanks a lot for posting this

Yep we did a podcast on this here: https://optionalpha.com/show71 check it out.

Yes correct.