Thx

Scott Swallows

]]>To determine an optimal portfolio return, one needs to focus on maximizing capital or in this case margin which represents the minimal capital required. According to the CBOE website regarding margin, a one-sided trade may cost 3.5%-5.5% of an underlying S&P contract, initially. This assumes Reg-T margin. There are many factors impacting the margin %, but the most significant are the inherent probability of success, the type of margin account and how well-balanced your portfolio is. Volatility and Days to Expiration and other factors are assumed to be incorporated into the % chance of success, so they are out of the equation for now.

Switching to Portfolio Margin may significantly improve your results as well as writing on both sides. Only the $ of premium is added to margin for the second side. Assuming a 95% chance of success, premium equal to 10% of margin is not unrealistic. If you have such an account you can see for yourself. A new wrinkle is the portfolio stress test imposed on accounts by trading firms which serves to only increase margins.

The amount of margin could be slightly lower but easily higher especially if the market moves on you. Since you are carrying risk for 2 months out implies a tie down of capital for that period and if replicated continually, i.e., 10% per 2 months, could possibly result in a return of 60% money over a year’s time. Over 3 year’s time, that would be a 4 fold increase in your money. Again, this calculation assumes margin is 100% utilized, no stress hurdles to overcome and every trade unfolds perfectly.

A more reasonable return would be in the neighborhood of 40% as extra cushion is generally needed above the required margin and not every trade goes as planned. More importantly there is a predictability to this return over playing it out long which is what makes short option trading so much more desirable. Consistency trumps alpha.

The Supertrader’s methodology makes perfect sense but unfortunately the dollars don’t. One poster suggests he “thinks” the story is true and another credits the “magic..” to exploitive position management. While there doesn’t appear nor do I believe there is any intent to deceive, the numbers just simply don’t add up. Seller BEWARE that if you are short on both sides of the market, selling strangles as it is, it is a mathematical certainty that you will be limited in your returns unlike going long. Albeit, while the returns over the long haul will be better by being short, the only way you will get $41 million in profits starting from $700k is if someone hands it to you. Tread carefully…the market doesn’t pay us hopeless romantics in kind.

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