The numbers are the truth and the numbers can be your friend if you are on the proper side of the expectancy equation. After reviewing all trades taken over the last two months, my best strategy per the numbers has been buying out of the money call options. The ‘when’ question has been a prickly one, because my worst strategy has been the always sexy YOLO. Coming in second place has been good old stock trading, which is toeing the zero line of expectancy.
My current win rate on normal options trades is 34.5% and 18.9% on YOLOs. My stock trading win rate is at a frumpy 50% aka coin flip. Yes, think about that next time you blindly follow me into a trade.
My average win on a stock trade is just a bit greater than the average loss. This is a very thin edge at the moment, almost not worth the intense time commitment and effort. My average win with options is about 3.5x the size of the average loss. Notable big winners contributing to the large average win size were X, C, CELG, TWTR, and MBLY. My average win trading YOLOs is only 2x my average loss. This could be because a solid win has not occurred to skew the data set.
There are a few areas for improvement. First is becoming more selective with stock trades. These type of positions need considerable amount of thought and planning and might be better as longer-term trades. Next is throttling back to YOLOs. The best strategy for me appears to be sticking with a YOLO for about 3 weeks, willingly purchasing another week of time as best is possible, and cutting bait if the trade never pans out. Two YOLO positions at a maximum with no more than 1.5% of risk committed.
Overall I have been using about 10% of my risk capital in normal option plays. After reviewing the statistics it seems reasonable to increase this overall exposure to 15 percent, slowly of course, with a penchant for only the best chart setups. Remember, this is the tendency with expectancy, to increase activity where expectations are highest. This in turn can lead to lower quality entries, very much something to watch out for.
The rest of my risk capital must either sit in cash or longer term investments. Current investments are TWTR, LO, GPRO, TLSA, and XON.
Thus my risk book looks something like this at the present:
Cash – 35%
Investments – 42%
Stock Trades – 14%
Option Trades – 9%
As you can see, I am in the uncomfortable position of having a heavy cash position into the start of a new month. I will be seeking to correct this as trade ensues next week.