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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!

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

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