Yes, most of these option techniques with their fancy names limit downside risk. But the compromise is that returns will be less smooth (just as with delta hedging). Thus, you cannot expect to consistently generate 3% per month. In a bad month, you may lose 3 times (9%) or more depending on which technique you employ and the parameters you set. But at least your losses will be contained within bounds you set, much wiser in long term.catameran wrote: The technique doesn’t sell naked options. All of the option spreads are fully hedged with determinable risk. They are low risk methods for a retirement accounts. It would include Iron Condors, Collars, and some vertical spreads to take advantage of directional movement. The broker I heard this from does it on his own account, and was in the business for thirty years. I have been simulating for less then a month and I am up more then the 3%, but will practice alot more before I use real money.
It is common to make 2 fast calculations (estimates) based on chance alone (accurately timing the market on consistent basis is next to impossible):
1. Percentage chance of breaking even or better.
2. Ratio of upside potential to downside risk.
Generally, the higher your number 1, the less attractive your number 2 will be. I don't think it is reasonable to expect an options trader to generate consistent positive returns on a month-by-month, year-by-year basis. There are always going to be some down months and/or years.
I believe the majority of truly great traders with strong long term verifiable track records realize that the best way to monetize their past performance is to lever other people's money by starting their own hedge funds. These typically pay them 2% up front and 20% of client gains. One good year with a big enough fund will make them wildly rich.
Now, I challenge you to find me just one hedge fund which: a. has generated annual returns of over 10% (net of all fees) each year for all of the last 10 years using options strategies, b. is open to new investors and c. generates its returns using highly liquid instruments with clear market values, d. allows easy entry and exit (6 months or less) without unreasonable penalties for doing so.
In investing and trading, short track records (a few months to 3 years or more) don't mean much. I've seen funds with 4 or 5 years of 20%+ gains each year lose all the gains and even most of the starting capital when markets suddenly changed. 10+ years can cover a full economic cycle and will show how performance adjusted to different phases. Just remember, even Warren Buffet has down years.