We believe in selling premium and in using statistics to put the odds in our favor but how do small traders stay in the game when unlikely events keep on occurring? We have some answers here which should be of interest to all premium sellers.
Experiencing consecutive losing months is always painful. It’s even worse for small traders since the losses will take a larger percentage of their account. This can lead to further strategy restrictions, which can impact our portfolio's future probability of profit.
A larger account, when following the tastylive philosophy, does not have this obstacle to overcome. A comparison of a $250K account and a $10K account taking position risks between 0.5% and a 1% position was displayed. The comparison demonstrated how it was easier to trade small in a larger account.
There is a trade-off when selling premium. Lower POP strategies generally require less capital so we are able to trade more positions. Higher POP strategies have more risk so they require more capital but this results in fewer positions. This forces us to make a choice between high probability trades and a frequent number of occurrences.
A graph of a seesaw with number of positions on one end and probability of profit (POP) on the other end was displayed. The graph showed that in smaller accounts a choice between less positions with higher POP and more positions with lower POP.
There is a trade-off between the relative capital required to put on a trade and the probability of success in smaller accounts. To increase the likelihood of success, allocate more of the portfolio to a limited number of riskier strategies.
A table of the probability of consecutive losing cycles versus the initial portfolio probability of profit of 50%, 60%, 70% and 80% was displayed. The table included the results of the first, second, third and fourth losing cycles. The table showed that with lower POP portfolios, consecutive losing months were more likely.
Watch this segment of “tasty BITES” with Tom Sosnoff and Tony Battista for the takeaways and the data to help you understand the relationship between higher probability positions and the overall risk relative to your account size.
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