A bit about going full time

tom said:
Best of luck. Have you decided on the strategy or trades ?
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With this low vol I am doing some out of the money broken wing condor with ridiculously high margin just to make a lousy 2% per month but if I can do that consistently over the year I should have a nice profit
With a little pull back and some higher vol I should be able to squeeze out a little more but the way the market looks at the moment it seems like every dip is getting bought so I will try to stick to the minimum of 2% per month
 
I will admit that the $700K-$800K was a generalization so I thought I would do some math to get a more accurate number.

Using the $1000 per month number that you mentioned and using the average per trade that I am seeing with the trades that I am doing which is 3.2% would result in requiring $31,250 of capital at risk. If you are risking 50% of the portfolio that would require a portfolio of $62,500. Now I do not know your monthly living expenses but I need more than $1000 to live on. If for example the monthly budget is $6000 it would require a portfolio of $375K. There are a couple of other factors that need to be addressed. If there is one of those nasty little events that show up from time to time that cause a 25% drawdown would result in a loss of$48,875. There loss of income because of the trading strategy stops producing income. Making the assumption that it will take 3 months of trading to determine that the trade is no longer working and the 2 to 3 months of testing a new strategy amounts to a loss of income for 5 to 6 months ( I am factoring in that the income from the testing will offset the losses in the last three months of the old strategy). This would lead to a drawdown of the portfolio of $30K to $36K. Then there is the issue that not all years produce the same returns no matter what kind of trading that is being done, even if you are a buy and hold investor so if during the course of the year the trades go from 3.2% to 1.6% you will only make half of the required income needed and will also cause a portfolio drawdown of $36K.

So it appears that my generalization was too high.
 
1. You do not just want to pay your bills and handle drawdowns, but want your account to grow to take care of the inflation. I think we should target 2X inflation rate because lot of the official inflation numbers are either too low or too high. On an account of 400K, I would rather have an extra 10-20K so that I start next year with 410-420K (approx).
2. Did someone say there are only two guarantees? Death and taxes.

I think 700-800K is a better estimate / generalization to account for a) twice the inflationary rate and b) taxes.
 
Marcas said:
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.
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Of course you should diversify.
However, having a 700K account does not mean every single dollar is margined. You may hold some cash, or a lot of cash.
Also, let us say you figured some technique through which you could make 100% year over year. Why would you not bet "most" of your "effort" towards it and why will you diversify? Mainly for the tail risk, so I say cover that as part of your strategy, see if you can not de-risk your account by betting smaller.

PS: You may not like the word "bet" but I used it only to enhance the beauty of the word "irresponsible". While I agree with the diversification strategy, you do need to lean more towards the side that is making money and if it causes your portfolio to become "slightly" unbalanced, well, that's life
 
Marcas said:
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.
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How long has full-time trading been your sole source of income, Marcas?
 
It wasn't my intention to argue with 700K or any other number in that mater. I wanted to point out on slightly different angle. For me going full time is a very complex issue and I'm interested what others have to say. There are many problems to be addressed. Doing simple math calculation helps but in many cases more work is needed. Books can be written. 700K might be right number for one person while for other not at all.

Harry rightly posted that in calculations we should include grow money (savings) and some cushion and other things.
Diversification is huge topic, there are many flavors of it. In fact it is nothing else than form of hedging - with it's important questions: what are you hedging against and what is your risk tolerance (in both terms: subjective - psychology and objective - financial and social situation). That is why I mentioned about multiple sources of income.

I must admit that tread is quite beneficial, it helps me focus thoughts on subject. I'm not full time yet, almost but not yet, and I don't intend trading to became my sole income source in foreseen future.
 
Here are some of my suggestions for going full time. I learned this from my own experience.

1. Do not base your financial plan on averages. They don't exist in real life.

2. Therefore, do not expect to draw down to pay for living expenses on a monthly or even quarterly basis. Plan on longer term. Otherwise, you will be putting yourself under too much psychological pressure. You won't trade well. For me, I do it once a year - ie I do my accounting and re-allocation of capital and draw down for expenses once a year. Yes, that means I must have at least 1 year worth of living expenses set aside in the bank before going full time.

3. Do not put 100% of your capital into options trading. I recommend no more than 50%. I personally do much less. No matter what others tell you, options trading is risky. No... you cannot completely hedge off the risk regardless how sophisticated the scheme might seem.

4. Have a separate portfolio that generates a stable income to ensure your worst case isn't zero income. This can be based on high yield equity, bonds, rental, etc... just not another options based portfolio. Even with a yearly draw down for expenses, there will be times when your return is zero or negative. You want a safety net.

5. Another thing I found really important - before I went full time, I thought I could practice trading a small account, $50K or so, prove to myself I could be consistently profitable over a period of time and then the rest will be easy. I could just scale up my capital 5x, 10x when I go full time. Nope..... Doesn't work that way at all. Trades that I could do with $50K becomes psychologically impossible when I'm trading $500K. And it's not like you can be more conservative and just adjust earlier in hope to get a lesser return based on the same trade. No, once it's beyond your psychological profile, the trade might go from positive to negative expected value. Adjusting earlier or putting more hedges could break the trade completely. At the end, I had to re-learn another trade that works for me psychologically with large capital size. Therefore, it's important that you find out what strategy works for you at the capital size that you intend to trade before you go full time.

In summary, I think the biggest obstacle for trading full time isn't an intellectual but rather psychological one. Therefore, we want to give ourselves lots of financial buffers and also find a trading style that go easy on ourselves psychologically, at least in the first couple years. After you're in it for a while, you can choose to be more aggressive if you want. Otherwise, I think the failure rate can be quite high.
 
Excellent thread and lots of great information from experienced traders here. Kevin you mentioned important points about psychological aspects of trading and scaling up, which other trade you moved to trade larger, is that M3 ?
 
Raj K said:
Excellent thread and lots of great information from experienced traders here. Kevin you mentioned important points about psychological aspects of trading and scaling up, which other trade you moved to trade larger, is that M3 ?
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Yes, primarily I transitioned from a high gamma to low gamma trade.
 
Kevin Lee said:
Here are some of my suggestions for going full time. I learned this from my own experience.
2. Therefore, do not expect to draw down to pay for living expenses on a monthly or even quarterly basis. Plan on longer term. Otherwise, you will be putting yourself under too much psychological pressure. You won't trade well. For me, I do it once a year - ie I do my accounting and re-allocation of capital and draw down for expenses once a year. Yes, that means I must have at least 1 year worth of living expenses set aside in the bank before going full time.
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I assume draw down here means withdrawing the capital used for trading for living expenses etc . Is that correct ?

Posted by Sanjeev B
 
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