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Expected Returns

Trading options allows us to take advantage of leverage, which can greatly increase our expected returns on a trade. This leverage also increases our risk. Because of the risk we are taking on, we expect our returns to be greater than the risk-free rate of return (which are virtually non-existent in a low IV environment).

At tastytrade, our main strategy is to sell premium in high IV environments. The strategies we choose will always yield an entry probability of profit (POP) over 50%. The closer we get to 50% POP, the more credit we receive. As we get closer to 100% POP, we receive less credit. Because all trades are unique and we usually do not deploy the same strategy over and over, we like to look at theta to give us an idea of how our portfolio may pan out over time.

Mathematically, if we can consistently achieve a 1% increase in our entire portfolio per day, we would realize a 365% increase per year. The caveat with this statistic is that our entire portfolio’s capital is not working for us 100% of the time throughout the year. Therefore, we tend to look at an annualized return while consistently using less buying power.

We conducted a study that shows that if we can make a 1% return per day on 5% of our portfolio, our overall portfolio return will be 18.25% annually. If we can make a 0.33% return per day on 20% of our portfolio, our annual portfolio return will be 24.33%. This is why we do what we do at tastytrade!

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