The leverage you get from options is just phenomenal.
The problem is too many traders get caught up in the idea of getting rich quick.
I’m sure we’ve all heard the stories about the person who turned $500 into $50,000 in a few short weeks.
But the truth is… they were swinging for the fences…
However, if you keep playing that game then you’re destined to lose it all.
I know, because it took me 8 grueling years for my trading to finally turn the corner.
If you want to have success with options, there are a few things you must do.
First, respect the leverage, and don’t oversize and get into over your head.
The second, level your expectations. Everyone is running their own race, focus on your progress and forget about how good or bad others are doing.
So what is the right amount of profit to expect on an options trade?
Should you be getting +100% or settling for 20%?
*See disclaimer below
Answering this isn’t black and white – I wish it was.
But I promise to give you my honest opinion.
How you set your targets could mean the difference between taking down a monster winner or getting stopped out.
The last thing any of us want is to turn a winning trade into a losing trade.
Nor do we want to leave money on the table.
Finding that balance is the special sauce that makes the delicious profit dish.
The single most important factor in determining profit targets is the time rame selection.
Option trades must align with the chart setup you’re using. If you take a trade using the 30-minute chart, then there is no reason to select an expiration that is months into the future.
And the expiration is a huge contributor to the gains or losses on a trade.
You see, there’s a greek symbol known as Delta. Think of it as the number of shares you control.
An at-the-money option (stock price and strike price are the same) has a delta is 0.50 for calls (-0.50 for puts). The Delta changes as you move further in or out-of-the-money, as well as over time.
Here’s a graph that shows what it looks like for a call option.
Notice how the further out from expiration you are, the flatter the slope of the line is.
So, how does this affect your options?
Options that expire way out in time don’t move as much with price. The closer you get to expiration, the more sensitive they become.
Also remember, options with less time to expiration are cheaper than ones further out.
Optimizing your hand
Tying this back to timeframe selection, your timeframe dictates how long the trade should take to play out.
Daily charts are for trades that take several weeks to a month to complete. Hourly charts should play out within a few days.
You want to give the trade enough time to complete. But, going out too far for an option expiration costs more and won’t be as sensitive to price movement.
That brings us back to the original question: What’s a reasonable gain on an options trade?
The answer – let your timeframe tell you!
Shorter timeframes mean options that expire sooner. Options that expire sooner should gain greater percentages.
But remember, when the options expire sooner, and you’re shooting for bigger gains, the chances for losses increase as well.
So, make sure you adjust your risk accordingly.
Let’s use an example.
Assume I want to take a long call option trade in stock A and stock B, both are the same price.
- Stock A has a setup on the 30-minute chart.
- Stock B’s setup is on the daily chart.
- For stock A, I buy call options one month out
- Stock B, I buy calls that expire the following Friday
- Both are the same strike price
If neither of these options are deep in-the-money, the call option for stock B will cost less than A. However, the call option for B will move more with changes in price and lose value from time decay faster.
Given these facts, I would come to two conclusions.
First, I want to risk less money on stock B’s options than stock A’s options.
Second, the gains on stock B’s options should be much greater than stock A’s.
Think about why this is.
Stock B’s options will make bigger moves for a change in the stock’s price than A’s, good or bad.
The gains and losses will be greater which is why I would risk less money.
Want to see how it’s done?
One of the best ways to learn is by seeing how it’s done.
And that way is with my LottoX service.
Here you’ll get weekly live training and a stream of my trades in real-time as well as my daily trading plan.