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Thanks Myrrdin, I've been working with a 5x multiple of premium as my exit point. While this allows for a high win rate when I do have a loser it wipes out a great deal of prior profits and takes much time to recoup. It also causes me amplified stress watching positions go against me. I very much appreciate your input as it gives me much to think about.
I'd like to set realistic expectations so I am curious - how percentage of your trades have a 100% draw-down?
So do you Incorporated Ron's strategy in to this 3% rule or you do not use the 6 times IM at all? Because what comes to my mind is that with the 3% rule it is hard to stay fully invested at all time. I think its a great risk management strategy.
There are many trades that I exit (or reduce the size of the position) before reaching the stop loss (eg. 100 % draw-down) or the normal profit taking point (usually something between 50 % and 90 % of potential profit). Reasons can include (additionally to the reasons mentioned in the earlier post):
An important report is approaching,
there is a strong reversal in the chart,
the expiry approaches (eg. less than 30 DTE).
I am more inclined to exit trades if the profit target is almost met. I do not want to take a large risk for a few percent of profit potential.
I am a discretionary trader, who has some rules, but checks every trade on a daily basis.
It is not easy for me to give this answer, as in my reporting one trade can consist of a number of entries and exits. An example: This year I sold Cotton calls, and I was too early. I had to buy them back. Short time later I sold again at a higher strike and a later expiry, and could take profit of approx. 50 %. I sold two further lots, and could take profit somewhere around 50 %. Thus, the total trade was profitable. (When I roll trades the size of the new trade again is within the limits of 1 % for each 30 DTE.)
Looking back at my short option trades in 2017, I remember two trades that were not successful: One in the bond calls, and one in the Live Cattle calls. The percentage of these loosers is below 10 %, but remember: There are a number of trades with small profits or small losses.
Your statistics looks reasonable to me and is what I would expect.
For me the main reason why not to accept higher losses are, that it takes a long time to recover from a draw-down of 600 % (you have to make 12 trades with a profit of 50 % to compensate), and that my sleep is much better avoiding such draw-downs.
I hope this answers your question. If not, please feel free to ask again.
I sell ES puts, but I use my standard rules. As discussed with Ron some weeks ago in this forum, I would get very nervous seeing my account melting down, when the losses get close to 6 times IM. At this point, delta has increased, and a further severe move downwards of the ES would make it difficult to exit at 6 times IM. In such situations, my sleep suffers ...
My current stop for ES puts is at a break of support of the S&P index at 2400, as I consider this support an essential one. (Usually my stops are wider.)
My rule refers to the value of the options, as I trade with different brokers who have different margin requirements. Margin usually is a bit higher. Thus, you need approximately 10 open trades to be fully invested. (I assume to be fully invested at 50 % of the account value.) As I not only sell options but also trade outrights and future spreads, there is usually no problem to find enough trades. I currently hold 14 open trades, counting short options with different DTE or strikes for one commodity and spreads as one trade.
More important: It is not important to be fully invested. When selling options it is more important to have a small number of loosers. If you manage to have only two successful trades open permanently for the year this yields a profit of 24 % ...
Currently I hold 5 short options trades (often it is more), 3 outright futures trades, and 6 future spreads. Additionally I hold a very long term long future position in the Euro as a pure hedge for the US stocks in my stocks account.
I rarely buy options.
You find some information regarding my trades in outrights and spreads in the commodites section of this forum (eg. threads on Grains & Beans, Softs, Seasonals).
What fundamental data do I currently look at before I sell options in the grains ? Corn as an example:
1. Tomorrow, Wednesday, an important report is published. No good time to enter a short option trade.
2. Pollination period for corn is usually in July. This year it is a bit late due to late planting, and might extend until the first week of August in the most important regions. I do not intend to sell calls until there are reliable weather reports for this period available.
3. Corn was planted a bit late this year. Thus, early frost could be a larger problem than in average years.
4. MW crop will be a desaster, but no-one knows how big the desaster will be. An exploding MW price could move corn price upwards.
5. COT data is not bearish. Funds have a lot of amunition to move corn price upwards if weather remains hot and dry.
6. I do not rely on seasonals in such situations. Seasonals are average values, but in weather markets deviations from the average can be huge.