A bit about going full time
- Thread starter Marcas
- Start date
Paul Demers
New member
Neither one is wrong. Please consider that the people you named in the list of strategies above have years of experience (I am a newbie compared to them). I think that no matter how much a person understands trading options the game changes when you are relying on your winnings to pay your bills. You start a new learning curve that will take time to master. I am using the 2% figure because I am a conservative person and also if the bar is set too high then there is a real risk of an emotional setback. Lets say your expectations are to average 4% per month and after a year you look back at the results and find that you only averaged 2%. What is likelihood that you might be disappointed with a 24% annual return? I have been trading for a living now for 5 years and while this has been my best year I have had a year where I had 0% returns. You need to be prepared for those both financially and emotionally. I think that is one reason why you have been seeing such a low percentage number from the people that have responded to this thread. There is no doubt that you should be able to get those 3% to 4% returns I just don't think you should count on them in the beginning.
Also remember this disclaimer that every money manager uses "past performance is not necessarily indicative of future results". No matter who's performance you look at keep that in mind. The market is a fickle beast and what is working now may not work in the future. You might be left with having to rework your trading strategy and that may cost you lost revenue as you are working that out.
Paul Demers
New member
Excellent summary, Paul. As you and others have aptly stated, it's the big...and I mean BIG...draw downs which occur approximately once every 2 years which either make or break traders. I always referred my students to the Neiderhoffer history as a case in point of overconfidence and inability to bail out of a massively losing trade. There were many similar tales in the financial crises of 2008.
Marcas: I am trading in an LLC to turn my trading capital gains into business income. As I reduce, and hope to eliminate my W-2 income, I need a few years of receiving K-1 forms should I need to borrow money for another home or credit card. Though banks will accept dividend and interest income when lending money, it has been my experience that they look sideways at capital gains.
I am using the LLC to deduct expenses that are reasonable and necessary to support my trading as business expenses thereby reducing my taxes. This will include cell phones, computers, cell phone service, printers, office supplies, accounting and legal services, accounting software, home office deduction, travel (to seminars). If anyone thinks I'm missing something, please jump in.
My goal is 1.9% a month. I've been hitting that since trading full time (2 years). My goal for 2017 is 2%.....Tony
Posted by tman
I am using the LLC to deduct expenses that are reasonable and necessary to support my trading as business expenses thereby reducing my taxes. This will include cell phones, computers, cell phone service, printers, office supplies, accounting and legal services, accounting software, home office deduction, travel (to seminars). If anyone thinks I'm missing something, please jump in.
My goal is 1.9% a month. I've been hitting that since trading full time (2 years). My goal for 2017 is 2%.....Tony
Posted by tman
Dan,
I couldn't agree with you more! Drawdowns are the single most important point of this entire thread!!
To everyone else,
Please remember that Dan and I have been doing this for a long, long time. Dan and I have lost money in new and innovative ways that most of you haven't even dreamt of yet. Our mutual friend, Steve Chanin, use to say that pilots and options traders are a lot alike.... "There are old pilots, and there are bold pilots... but there are no old, bold pilots." Or maybe you have not yet had the pleasure of experiencing Mike Tyson's quote... "Everyone has a plan until they get punched in the face."
I have a question for you all: When is a 4% average return better than a 12% average return?
For the answer, look at the attached "Understanding Risk" slides.
Did you get the answer right? If Mr. Market or Mike Tyson would have punched you in the face, like they have done to me, you would have the answer right. I created these slides for those of you lucky enough not to have experienced this punch in the face... yet!
Posted by Jim
I couldn't agree with you more! Drawdowns are the single most important point of this entire thread!!
To everyone else,
Please remember that Dan and I have been doing this for a long, long time. Dan and I have lost money in new and innovative ways that most of you haven't even dreamt of yet. Our mutual friend, Steve Chanin, use to say that pilots and options traders are a lot alike.... "There are old pilots, and there are bold pilots... but there are no old, bold pilots." Or maybe you have not yet had the pleasure of experiencing Mike Tyson's quote... "Everyone has a plan until they get punched in the face."
I have a question for you all: When is a 4% average return better than a 12% average return?
For the answer, look at the attached "Understanding Risk" slides.
Did you get the answer right? If Mr. Market or Mike Tyson would have punched you in the face, like they have done to me, you would have the answer right. I created these slides for those of you lucky enough not to have experienced this punch in the face... yet!
Posted by Jim
Tim
Member
Wonderful thread. Here's the abridged version of my journey. I have to make an appointment in a few minutes...
Got really serious about trading in 2008. Went through a mentoring program (Sheridan mentoring) in 2009 and it was the best things I ever did. Jump started me and made a broad exposure to all the basic strategies. From 2009 to 2011 I kind of floundered, wining some and losing some. Overall about break even. Then in 2011 something happened - my returns were consistent and increasing. After seeing that for a year, I decided it was time to leave the job and trade full time. It took three years to get there.
What happened in 2011? Three main things - I quit trying every new strategy that came along, quit trying to follow anybody else, and focused on RUT and SPX and only a couple of strategies. These made a tremendous improvement in my returns and consistency. Here is a graph of my actual trading results at that time.
On the subject of account size, I highly recommend using not more than 20% of your liquid net worth to trade options with and then, of that, most of the time actually having 50-70% deployed. Once you show consistency and risk management you might be able to increase these two thresholds.
On the subject of returns, until you show consistency you can probably expect 0 to 1% return a month. When you get good at the one or two strategies you are going to follow, I think 3-5% a month is reasonable ON ACTUAL CAPITAL DEPLOYED.
On the subject of trading with an entity, I think it is useful. I trade under my own C corporation as well as personal accounts. Trader's tax status not necessary as mark to market accounting is required for my company. But it pays all health insurance, expenses, OV subscription, training etc. A lot of extra work but worth it.
Can add more later but I wanted to add my experience.
Got really serious about trading in 2008. Went through a mentoring program (Sheridan mentoring) in 2009 and it was the best things I ever did. Jump started me and made a broad exposure to all the basic strategies. From 2009 to 2011 I kind of floundered, wining some and losing some. Overall about break even. Then in 2011 something happened - my returns were consistent and increasing. After seeing that for a year, I decided it was time to leave the job and trade full time. It took three years to get there.
What happened in 2011? Three main things - I quit trying every new strategy that came along, quit trying to follow anybody else, and focused on RUT and SPX and only a couple of strategies. These made a tremendous improvement in my returns and consistency. Here is a graph of my actual trading results at that time.
On the subject of account size, I highly recommend using not more than 20% of your liquid net worth to trade options with and then, of that, most of the time actually having 50-70% deployed. Once you show consistency and risk management you might be able to increase these two thresholds.
On the subject of returns, until you show consistency you can probably expect 0 to 1% return a month. When you get good at the one or two strategies you are going to follow, I think 3-5% a month is reasonable ON ACTUAL CAPITAL DEPLOYED.
On the subject of trading with an entity, I think it is useful. I trade under my own C corporation as well as personal accounts. Trader's tax status not necessary as mark to market accounting is required for my company. But it pays all health insurance, expenses, OV subscription, training etc. A lot of extra work but worth it.
Can add more later but I wanted to add my experience.
So Marcas, I'm sure you are starting to get the picture ... the reason you supposedly "can't do it" is the interplay between "legitimately" protecting your capital and "psychologically" protecting your capital ... they feed off each other until you're only trading a small portion of your money with any real risk and every trade is a little "toy" trade.
In other words, you're supposed to trade like a little girl.
That's fine for old coots like me who already have a bundle to protect, but it's not doing justice to the great tradition of pulling yourself up by your bootstraps, becoming a real trader and achieving real success at this game.
If you're passionate about trading (and not just passionate about quitting your day job), and really believe you can do it, and truly believe you are ready, then I would say go for it, risking portfolio-wide up to 50% of your total bundle (50% of every last cent you have in the world) at any one time - so you can blow out once, maybe twice, and still come back. That's basically what I did when I was trading hard. But the 50% should be absolute maximum catastrophic risk, for when "the big one" happens, not 50% every time there's an ordinary crash. For ordinary crashes use very aggressive (and expensive) tail risk management.
P.S. You don't sound like you are ready, and if that's the case then PLEASE ignore this post.
Paul Demers
New member
Before you set up an entity I suggest consulting a good business tax lawyer. It is my understanding that using a C-Corp is not a pass through like an S-Corp. That means that the trading profits will be taxed on the corporate level and then taxed again as personal income when you pay yourself from the C-Corp. I am not a CPA so don't take this as tax advise. I also feel that tax discussions are a little out of the scope of these forums as they could lead someone down the wrong path and end up with issues with the IRS.
Ditto Paul ...
Folks, there are a lot of scams out there pushing non-trading businesses (option traders: this usually means YOU!) into complex c-corp structures with deductions that won't survive an IRS examination ... if you get interested enough to pursue this then I strongly recommend passing the final structure by Robert Green at greentradertax.com with an inexpensive consultation (read their e-book first, that will probably scare you off most scam structures and only cost you a few bucks). I've been a Section 473 MTM trader since 2003 and keep up with this stuff ... the fundamental problem is that most option traders will NEVER achieve trader tax status. If you want to swing trader tax status then you need to structure your trading so you do at least 4-5 trades per day on average. At that point the c-corp MIGHT make sense, but for most folks an LP structure will probably work better ... and a simple pass-through structure has a lot to recommend it.
Folks, there are a lot of scams out there pushing non-trading businesses (option traders: this usually means YOU!) into complex c-corp structures with deductions that won't survive an IRS examination ... if you get interested enough to pursue this then I strongly recommend passing the final structure by Robert Green at greentradertax.com with an inexpensive consultation (read their e-book first, that will probably scare you off most scam structures and only cost you a few bucks). I've been a Section 473 MTM trader since 2003 and keep up with this stuff ... the fundamental problem is that most option traders will NEVER achieve trader tax status. If you want to swing trader tax status then you need to structure your trading so you do at least 4-5 trades per day on average. At that point the c-corp MIGHT make sense, but for most folks an LP structure will probably work better ... and a simple pass-through structure has a lot to recommend it.
Tim
Member
Tony - yes there is no 60/40 split in a C corporation, its all taxed at the corporate tax rate. That is also one reason why traders tax status doesn't apply in a corporation, at least in a C corp. I don't know about LLC or S corps.
There are a lot of scams out there and you have to be really careful. I have read Green's book and while I think it is very good, I also think Green is one of the ones who will push you into a unnecessarily complex structure, such as an S corp owning a llc that trades or something like that. As did a private business lawyer I consulted once. Part of the reason I think is to insulate you from liability if your company takes other people's money and trades with it. For my case, the corporation trades only with its own capital. And in my case my corporation was founded long before I was a trader, for other lines of business, and the board has approved morphing options trading into one line of business, and it still has another non-trading line of business. I am a regular W-2 employee of my company. I cant give tax advice either, but I do work with several CPA's and a bookkeeper and have instructed them to be squeaky clean with the books and taxes.
You don't have to hire a lawyer or Green-type company to incorporate, you can do it yourself. It would probably cost less. But there is a lot of paperwork, regulations and requirements you have to meet. It is daunting. And it costs hundreds a month just to exist - licenses, CPA's, bookkeepers, utilities and regulations.
I have also looked into trader tax status for my personal trading, and I agree with Steve that most options traders will never qualify for it if the gray area of a test that IRS uses was applied.
It is true that C corp profits are not pass-thru. When profits are distributed to me, via a dividend payment, yes it is taxed twice. When profits are given to me via payroll, there isn't a corporate tax however the company does pay what is commonly known as the payroll tax, which amounts to 6.5%. IRS usually expects that the company isn't making too much profit because it distributes it to employees via payroll, or owners as dividends. In fact I have learned that if the company keeps too much profit it is a red flag with the IRS.
Sorry if this is Too Much Information. However I enjoy having it and running it.
There are a lot of scams out there and you have to be really careful. I have read Green's book and while I think it is very good, I also think Green is one of the ones who will push you into a unnecessarily complex structure, such as an S corp owning a llc that trades or something like that. As did a private business lawyer I consulted once. Part of the reason I think is to insulate you from liability if your company takes other people's money and trades with it. For my case, the corporation trades only with its own capital. And in my case my corporation was founded long before I was a trader, for other lines of business, and the board has approved morphing options trading into one line of business, and it still has another non-trading line of business. I am a regular W-2 employee of my company. I cant give tax advice either, but I do work with several CPA's and a bookkeeper and have instructed them to be squeaky clean with the books and taxes.
You don't have to hire a lawyer or Green-type company to incorporate, you can do it yourself. It would probably cost less. But there is a lot of paperwork, regulations and requirements you have to meet. It is daunting. And it costs hundreds a month just to exist - licenses, CPA's, bookkeepers, utilities and regulations.
I have also looked into trader tax status for my personal trading, and I agree with Steve that most options traders will never qualify for it if the gray area of a test that IRS uses was applied.
It is true that C corp profits are not pass-thru. When profits are distributed to me, via a dividend payment, yes it is taxed twice. When profits are given to me via payroll, there isn't a corporate tax however the company does pay what is commonly known as the payroll tax, which amounts to 6.5%. IRS usually expects that the company isn't making too much profit because it distributes it to employees via payroll, or owners as dividends. In fact I have learned that if the company keeps too much profit it is a red flag with the IRS.
Sorry if this is Too Much Information. However I enjoy having it and running it.
Interesting, I didn't think of this. It seems to have a merit, I have some doubts/questions also.
I'm fully aware of this. That is why I plan to trade about two main strategies and work on strategies for different market conditions. Big deal seem to me how to spot that market changes/changed. You can use different metrics from very simple to very complicated. This area is pretty unpracticed by me so far.
Draw dawns are big issue of course, I'm aware of them as everyone should be, not only full time traders. I'm trying to protect myself as good as I can (it may seem nothing, but account structure helps me a lot). I was expecting answers that 2% comes from costs of hedging but drown downs… it may be more serious than I thought.
Tim, I'm glad you stepped in. I know you from Sheridan tv and Chicago seminar. If I remember correctly Parking Strategies brings about 3.5% too and it is easier to see trade risk here and need of still discipline. I'm about at the same stage you were in, lets say 2012. Wonder what capital you were playing then (it is quite personal,don't need to answer ofc).
I measure yield on planned capital rather than on capital at risk it makes more sense to me on long run, on single trade capital at risk is more informative.
I do
in many ways I don't want this tread to be only about me and my decision. Everyone is different in different situation and everyone has to make this decision by his own, even if it is to be decide whom footsteps to follow.My approach to markets is such that markets wants to take my money right away. If not succeed first time it will try and try again working on lowering my guards if needed. Now I have some doubts if this model serves me the best but this is another topic.
Because of this model I'm not brave enough to put all my money into market (I fully understand position stressed by Paul). I need to secure alternative sources of income and while 2% or 4% don't make _huge_ difference to me it is still 100% difference in profits. Safety cushion is very important.
Quiting job in my case is motivated mostly by freeing time for life. Well, maybe it is not as easy as it may sound.
I'm listening to tax talks. I agree that any steps here need to be consulted with professionals (get few opinions if you can) but it is interesting to see what can be achieved on this matter. I hate paperwork...
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This is a very useful thread. What I gathered from this thread is that if an
experienced option trader is able to consistently achieve returns in the range of 2% per month on the planned capital, than he or she is doing pretty good.
Elite option traders (may be top 5%) with lots of experience under their belt could be an exception as they might be capable of generating between 4% to 6% per month.
Posted by Sanjeev B
experienced option trader is able to consistently achieve returns in the range of 2% per month on the planned capital, than he or she is doing pretty good.
Elite option traders (may be top 5%) with lots of experience under their belt could be an exception as they might be capable of generating between 4% to 6% per month.
Posted by Sanjeev B
I was wondering if this can be measured in percentage of margin ?
What is a decent risk reward percentage that an experienced option trader can make ?
For me the percentage on planned capital is not easy to calculate as I have various accounts with different amounts of cash in it and depending on market conditions I may risk more or less by using different strategies so I don't really place trades based on a set amount of capital so it would be easier for me to know if let's say I can make 2% per month on my margin
Is that good , bad , average ?
What is a decent risk reward percentage that an experienced option trader can make ?
For me the percentage on planned capital is not easy to calculate as I have various accounts with different amounts of cash in it and depending on market conditions I may risk more or less by using different strategies so I don't really place trades based on a set amount of capital so it would be easier for me to know if let's say I can make 2% per month on my margin
Is that good , bad , average ?
Are you talking about Reg-T or PM/SPAN margin? If Reg-T, it seems like an average return.
Posted by Ice101781
This is a great thread. Thanks to all who shared their experiences and to Sanjeev for reviving it. I've found it hard to network with full-time traders (not including those in retirement who already have homes paid off, nest eggs established, and who trade as much for the enjoyment as the need to pay living expenses). I think very few exist. Compounding the scarcity is the fact that people like to trade different vehicles/strategies. I'm always looking for other full-timers with whom to collaborate and I haven't had much overlap with the few I have met.
I agree with those who say 2% per month, even for experienced traders, is a more reasonable expectation. I would say 1-2% per month which, as has also been pointed out, would make for an enviable track record for many hedge fund managers--especially if one could make that last.
I agree with Paul that a reasonable starting capital from which to cover living expenses is more on the order of $700K-$800K than it is $200K-$300K.
I agree with Tim about GTT. I read one of his books several years ago and requested a quote. Based on that and much anecdotal feedback I have heard from other traders, he does seem to make things complex. I found a local accountant who has done a great job for me since ~2009 when I was mismanaged by a trader accounting company out of Arizona.
Finally, Kevin pointed out the importance of not chasing every shiny thing or any of the deceptive pitches out there that promise unrealistic returns. I agree wholeheartedly. These completely litter the landscape and they really tempt our greed. One only needs to fall for one or two of these in order to lose a great deal of money and be disheartened enough to walk away from trading altogether.
I agree with those who say 2% per month, even for experienced traders, is a more reasonable expectation. I would say 1-2% per month which, as has also been pointed out, would make for an enviable track record for many hedge fund managers--especially if one could make that last.
I agree with Paul that a reasonable starting capital from which to cover living expenses is more on the order of $700K-$800K than it is $200K-$300K.
I agree with Tim about GTT. I read one of his books several years ago and requested a quote. Based on that and much anecdotal feedback I have heard from other traders, he does seem to make things complex. I found a local accountant who has done a great job for me since ~2009 when I was mismanaged by a trader accounting company out of Arizona.
Finally, Kevin pointed out the importance of not chasing every shiny thing or any of the deceptive pitches out there that promise unrealistic returns. I agree wholeheartedly. These completely litter the landscape and they really tempt our greed. One only needs to fall for one or two of these in order to lose a great deal of money and be disheartened enough to walk away from trading altogether.
I don't. I mean it would be nice to have 700K account to start full time but if this amount to be 'reasonable' not many of us would qualify. Even if one have 700K at his disposal he should not put all this money into stock market. It is irresponsible - providing 700K is most of one's liquid assets. This sum should be divided and applied to different investments/income sources. I'm not talking here about simple 'diversification'. Just my opinion.
I'd like to point out another approach to 'going full time' - very simple and obvious but it would be good to put it in writing in this tread. Try to think how much money per month would be ok with you. I mean from trading. Let's say it is $1000. Now look at your account size and think if you can deliver 1K per month on regular basis on it. Doesn't matter if you have 10K or 700K. Can you make 1K month after month? Are you sure? What will happen if for some reason account size will shrink 10% - will 1K be still in your reach? What about 30%?
All % based calculations are important but for 'going full time' most important is long term return on whole account including all strategies and cash on sidelines and based on low ovetall risk.
My opinion.