Profit Targets

Look for a new track that trade later today.
The plan is to start a diagonal spread and to compare it with a credit spread.

Live meeting at noon CT. One hour of questions and answers.
Members received an invitation via e-mail.

Brand new option traders almost always ask: “How much money can I earn?”
That is a bad question for many reasons.

Nevertheless, trade plans require making an estimate of earnings potential. I believe it makes sense that we do not want to take risk without knowing the potential reward.

But beyond the monetary aim for each trade, or each month, is the need for a Master Plan.

The Problem

Let’s say you are a seasoned trader who is making a serious attempt to get involved with options. Perhaps you’ve dabbled in the past, but now you own a stock portfolio and are seeking a way to trade the markets with less risk and a satisfying rate of return on your investments.


If you target a non-very aggressive earnings goal of 1% every month, that is far better than anything available to the average trader in today’s low-interest world. Let’s agree that you are willing to accept moderate risk, and want to earn income by selling option premium.

You have alternatives. Writing covered calls offers the opportunity to generate income, but does little to reduce downside risk. Let’s agree that you choose to sell credit spreads. Your naturally bullish nature suggests selling put spreads (actually equivalent to writing covered calls and buying a farther OTM put as insurance). However, to have more of a market neutrality for your option portfolio, you are prepared to also sell some call spreads. Thus you find yourself trading iron condors — possibly with a bullish bias.

Let’s say that all goes well. Your basic trade is an SPX 10-point, 6-week iron condor. The premium collected tends to range from $.95 to $1.20. Margin (and money at risk) is roughly $900. Each winning trade is closed when the profits reach $0.40. Let’s assume that 5 cents covers expenses and that the remaining $0.35 represents a 3.9% return on your investment. This is far more profit than your target, but it turns out to be more than enough to cover your losses.

So what’s the problem? There is none for the disciplined investor. But human nature being what it is, most people who found themselves in this situation would want ‘more’. Instead of targeting a profit of forty cents per trade, the urge becomes to go for 50 then 60 cents. And that is a problem. The very nice, successful plan worked like a charm, giving you the income you sought and helps you maintain your lifestyle and meet your financial needs. that should be enough for anyone.

But if you become dissatisfied with ‘money being left on the table’ then it is possible to get into serious trouble. Earning 1% per month involves far less risk and can be achieved far more often than seeking 2% per month. And that is the problem.

I urge the successful trader to think very carefully about becoming more aggressive. Sure it is a reasonable decision for the right trader, but it can turn a comfortable situation into a financial difficult for the wrong person with the undisciplined personality.

Know what you need to make your financial life happy. If you achieve that, be careful about putting that comfort at risk.

One Response to “Profit Targets”

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