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A bit about going full time

  1. Every trader, at one point or another, especially after long streak of wins ;), considers possibility of living of trading. I noticed few fellows here on CD who mentioned this and I consider this move myself too. There are few ways to approach subject; one can simply jump into the water with conviction that he somehow learn to swim in process just because it becomes matter of life an death, others rather stay on the beach lay down on sand and dry practice swimming movements, practice, practice and practice…
    I find myself in position of thinking of consequences that arise from fact of entering water at all.
    It seems that one of challenges I have to face is my mood swings – I know how loosing trade makes me feel leery and I know euphoria like state I'm in when my trade makes money - I think I can deal with it.

    No doubt each situation is unique and there is no one and only path leading to “professionalism” nevertheless I would like to hear your thoughts. I'm interested in every aspect of it, as in general ideas as in particular, specific problems – there is now way I was able to get to every aspect of this at my own. If this idea just passed your mind or if you are already swimming for a while, please, share if you will.
  2. On a similar note does anyone run their personal trading activity through a pass through entity such as an S-Corp? What are the tax advantages? Can you write off your commissions or the cost of OV? I'm especially considering this as Trump campaigned on reducing pass through taxation to 15%.
  3. Hi Marcas
    Early on in my options trading career I made the decision to go full time. I have learned a lot from the experience, mostly on how ill prepared I was for the emotional aspects of trading for a living. No matter how well prepared you are in understanding how the greeks work and have back tested the trades you are doing everything changes when you are relying on the profits from your trading to pay your bills. At one point I became so discouraged I stopped trading and took a W-2 job for a while. In the end I decided that trading was where I wanted to be. Based on my experiences I could probably write a book or do a webinar series :).

    Hope this helps.
  4. Yes, Marcas, the decision to trade full time is a daunting one. For me, it was a bit different. In my late forties I knew that my career as a neuropathologist was, of necessity, drawing to a close because of retinal problems and the decline of fine, detailed vision. I had been interested in trading and, like most folks, had dabbled a bit. I considered moving into another branch of medicine, of course, but opportunities were a bit limited in my situation and age at that time. So, I dove headlong into learning to trade stocks and options. I bought the few materials which were available then and took the plunge. Over time, I also added futures trading to my "skill set", but gradually became an options trader primarily and was able to make a living entirely from trading. Of course, my trading returns have never matched my income as a neuropathologist, but I expected that. Here are a few things I learned in the process: 1. the first year or two will likely prove difficult since "hobby" and "job" are radically different in terms of trading. I have friends who experienced this, some of whom had to return to a "day job". 2. the win rate and returns in real dollars (or pounds or AUD) may not be as large as expected. A working spouse can help to fill in the gaps, but that is not the ultimate goal, of course. 3. As losses appear, there is a temptation to constantly try a new strategy in order to avoid losing more money. This approach generally does not work. It's far better to stick with 2 or 3 strategies, each of which is known to work in specific market environments. 4. there is a temptation to increase size too soon. This can be dangerous. As they say, if a trader can't make money with a small size, why should he or she be able to do it with larger size? 5. gradually, skill and confidence improve along with knowledge of expected return and other metrics of successful trading which help to "fine tune" the trading returns 5. the ability to take a loss when needed without hesitation and without looking back will eventually develop out of necessity. Otherwise, the trader will "blow up". 6. Obviously, as numbers 1-5 illustrate, it is vital to have adequate capital before taking the plunge. I had begun to save like a miser and invest in Treasuries and high grade corporate bonds, both of which were paying good interest at the time, for several years prior to actually resigning my practice partnership. In today's economy, I think it is critical to have a healthy nest egg prior to trading full time. Hope this helps.
  5. This will be a very beneficial thread! As has been mentioned, most anyone who has tasted any success has at least had the passing thought of doing this for a living.
  6. Maybe this isn't that place for this discussion, but I think we should start a thread talking through tax issues/ideas for those who are trading for a living, or can justify operating under some type of entity.
  7. Go to Greentradertax.com and buy the Trader tax Guide. I have used these guys for 15 years and they are the best, both for general information and professional services. All your questions will be answered in painful detail.
  8. My 2 cents:
    There is no substitute for starting with adequate capitalization (actually there is one: being young enough to take excessive risks with small capital and probably blow out a couple of times). Don't do it unless you've got at least $200k - $300k to commit, and if you're on the low end of this be prepared to live a modest lifestyle for awhile.

    Don't do it unless you are a good risk manager. It helps to have the psychology that (A) you don't get emotional about profits and (B) you care a lot about losses, and the losses drive you to work on your strategies and risk management rather than just despair.

    Have modest expectations. Forget about 50%+ per year and just try for 20% with insanely aggressive risk management.

    I've traded for a living as a market maker (easy) and a retail trader (harder), but I had my biggest success in dollar terms just trading retail following the script above.
  9. There is so much that can be added to this thread.

    You need to develop a good business plan.
    Risk management goes further than the trades.
    Health and well being is important.
    Know and understand your limitations.
    If you can't sleep at night then you are trading to big a size
  10. This thread is very useful. I hope more full time traders and chip in and share their journey as well to inspire and guide the rest of us.
  11. Thanks for thoughts, few issues popped up that I neglected, some intentionally.

    I 'd like to add a bit about capital requirements. Futures traders trade by units. One may trade 1, 2, 5 or 10 units, of each unit only small part is put into particular trade - .5 to 1.5 or 2 or even3+%. Unit size is about 100K, so it is in line with suggested 200-300K. I will be trading significantly smaller amount, though. I hear bunch of warnings coming my way – Iknow what are they about , but, as I said, each situation is different. My goal is 3-4% per month which may seem not too bad for short term – for longer it requires effort and discipline and other things but is is doable. Couple strategies popular on CD are in that range. One important concept that I realized, being member of CD, is approach to capital: money on trading account are not money, it is a tool, means you can not look at them as at Bahamas vacation but as a hammer or car taking you to daily job – I will not sell my hammer to buy a bear case. I have to be very careful with trading capital and be prepared to replenish it if necessary. So 3-4% is my goal and I can survive in case of few months of drought. It is sound advice to have a healthy nest egg prior to trading full time but it is general advice (I read this as advice about being able to support oneself in downtime and, most important, not to put oneself under tremendous pressure while trading) but I think it can be achieved by other means as well.

    Other things I neglected are taxes. I purposely pushed it for later. My understanding is that incorporated structure will not have direct effect on taxes (you can include commissions, software cost, learning expenses etc. into costs ether case), but it may be useful in structuring your situation vs irs in broader perspective. I will be outside 'trader by irs definition' for a while. It is also in my field of view moving to place with better tax treatment.

    Although I see my position as not too stressful (doesn't mean stress-less) I anticipate problems on psychology side (from many directions) – Paul, I'm very interested in your book… but I can not theorize here I have to face it.
    On a long side (short side being organizing your desk, system, workflow etc.) I do not intend to trade for trading itself, no matter how much I like it, I want to free my time and my head to do something good as for myself (I have a loooong list of books to read – and many house projects too :) ) as for others even if it will be just supporting those who can do more good than I can. I notice this direction of activity in many traders and businessmen and I appreciate it a lot (one don't have to look too far :) ).

    One more thing that was mentioned – health. It is very important as I cant trade while sick or having a headache. I'm working on it. Seems obvious but there was only one person, to my knowledge, who mentioned it on CD before – Ed Tulauskas.

    Again, thanks for sharing thoughts and experience, I hope this is only beginning of tread. I'm considering full time now more than ever and maybe I will be able to add bits more later on.

    On private note: Dan are you familiar with work of John Eccles? I find evolution of his position on role of brain very interesting.
  12. I hate to be the turd-in-the-punchbowl, but I think it is unrealistically optimistic to plan to make 3-4% per month. Planning to make ~20% per year consistently on your asset base (over a full market cycle) may be possible but only for the cream of the crop traders (perhaps top 5% or top 1%) in communities like ours.

    The top money managers in the world have track records along the lines of 15-20% per year at a 1.5 sharpe ratio. I'm ready to acknowledge that there's a big difference between managing $1B+ versus trading $250k, but regardless, it's important to have some perspective regarding the goals we set for ourselves relative to the ceiling of what has been achieved by some of the most talented traders in the world.
  13. Hi Marcas. Yes, I remember Eccles from my neurophysiology courses in medical school and my fellowship. I have always had an abiding interest in philosophy, and I am aware that he is also known for some of his philosophical concepts. However, I am not intimately familiar with his work.

    Best of luck to you in your goal to become a full time trader. I certainly don't want to discourage you in your quest but, to be honest, I have to agree with AKJ that 20% a year is, perhaps, unrealistic when you are first starting out. May I suggest a target of 10% for the first few years? Remember, many fund managers and equities/bond traders would be thrilled to net 10% a year.
  14. It does depend on what the 3-4% per month reflects, is it on a per trade basis or the entire portfolio? I also agree that expecting 3-4% is an ambitious goal to start with.
    Here is how I now look at capital requirements:
    You need at minimum 1 years living expenses in the bank separate from the trading account.
    To help figure out your working capital requirements you need some trade data, preferably live data.You will need a trade that has a positive expectancy rate (very important) then your average monthly return rate. Dividing your monthly income requirement by your average win rate will give you the minimum amount of money that you will be required to put at risk per month. At best this should be no more than 50% of your account size so you should at least have double the amount required.
    Required monthly income is 6,000.00
    Average rate of return on the trades is 2%
    6,000.00/2% = 300,000.00
    300,000.00/50% = 600,000.00
    (hope my math is ok)
    So the results show that to have a reasonable expectation of making 6,000.00 per month your start up capital of your business needs to be 672,000.00.
  15. Excellent discussion.

    From my experience, 10-20% annual return is realistic after some experience. I had a goal of trading full-time years ago but dropped that goal after a few years. I realized I was placing too much pressure on myself. I do make enough trading to live a very simple lifestyle. I did quit my day job in February 2015 but have been a part-time self-employed software engineer since then. I create mobile apps for companies 20-30 hours per week. I enjoy the work and it pays well. Trading has allowed me to work part-time since 2009. My former employer reduced everyone's hours from 40 hours to 32 hours after the 2008 crash. A year later they offered to raise my hours back to 40 and I declined. My work hours have been slowly declining since then. I currently plan on eventually settling on 20 hours per week. I have no desire to be a full-time trader now. I believe many would love to work only part-time.
  16. Great discussion
    I would say 3-4% per month on one trade is quite high that's 36-48% a year
    If I could make that consistently every month without loosing I would consider retiring and going full time also
    Now if you spread it out over 2-3 months than doing 3-4% per trade is more doable and much easier to manage
    I would try and paper trade going full time
    In other words pretend that you are a full time trader and write down all the expenses you have that would be paid from that account (no cheating) and see where you are in one year

    I think working part time while trading is also a good step in between to see how it works
    If you can make more money consistently by trading than working part time than I think you have a good chance of going full time I think part time is also better because it forces you to take a break from looking at the screen all day and give your brain a chance to relax and think about other things

    Even if you are full time you may want to get a hobby or do something else besides trading although that would depend on what kind of trading you are doing
    If you are doing BWB trades once you place the trade you are pretty much done with trading and can take the rest of the day off and just check how it looks at the end of the day to see if you need to adjust

    If you are day trading than you are pretty much stuck at staring at the screen all day looking to place a trade and than quickly take your profit or loss and look for another trade and hopefully not get burned out or go insane after a few months and or years of doing that I am pretty sure I would not want to do that for a living even if I can make 3-4% per month
  17. I quit a high paying corporate management career to go full time trading. There are a few things I realized were important in my journey. Let me share with those who have similar career path.

    1. Firstly - the main reason is I quit a comfortable high paying job is I enjoy the freedom of trading more - no need to convince anyone or be accountable to anyone except yourself. In addition, I love the intellectual challenge of trading. Results are completely based on your own capability and dedication. One important thing - money was NEVER the main motivation to begin with. Personally, I think that's critical because success in trading is a long and winding road. If money is the main motivator, the chances of quitting once you hit a rough patch along the way will be high. The irony is the less you focus on money and the more you focus on perfecting the skills, the more money you'll end up earning in the long run. For me, I'm now earning more than my corporate salary.

    2. It took me 5 years to get ready for full time trading. I started by subscribing to all kinds of classes and mentoring. Then I realized it wasn't effective learning while working. So I took a 2 year sabbatical to do full time learning. This was really helpful. Through the full time learning, I realized there are many shinny objects in the market that promise short term profits but do not deliver. I took many courses, subscribe to trade along services, hire coaches. I learned options, technical analysis, day trading, swing trading, etc... during the 2 years of intensive learning. I realized 9 out of 10 things out there don't work. Most are either marketing gimmicks or techniques that used to work once upon a time. These 2 years of sorting through what's real and what's fake was really important.

    After I found what I liked, I went back to work while I practice live trading with the safety net of a corporate job for another 3 years. With my own track record to base on, then I took the leap.

    3. Insist on track record and be data driven - continuing on what I mentioned above, I would say having a data driven mindset is truly important. That because there are so many people out there trying to convince you that what they teach is the true north. Anything you learn must be first fully tested and backed up with real performance data. Otherwise, it's really easy to deplete your learning budget by trying things that you come across.

    4. Safey net is extremely important. Although options trading provides me the highest return, I'm only deploying a fraction of my total capital. The rest goes into long term equity investments and other high yield investment. With that I know even if I don't earn anything from options for a period of time, there is cash flow coming in. Another really important thing is I know even if I lose 100% of my options trading capital, I will not be thrown out on the street. With this kind of assurance, I'm less stressed and it definitely improved my performance. As a result, I do not have to keep looking for the holy grail that provides me profits with safety (which doesn't exits, no matter how lucrative the promises are).

    5. Moving to low gamma trade - this one is really critical for me, otherwise I couldn't scale up. Strategies that allows the P&L to swing like a pendulum might potentially end up yielding higher long term results, but it's not practical for full time trading. When I was backtesting, those strategies were great. Trading small tranches were fine too. But to trade for a living, you can't keep trading small sizes. That's when I realized I had to give up big yield in exchange for smoother yield. Some of these strategies might look exciting but do remember when trading is the only source of income, excitement is never an objective. Safety is paramount.

    I can go on for a while more but I thought the above are the key points. Hope that's helpful.
  18. Great responses. I quit my day job in 2009 to trade full time. I ended up going back to my full time job in 2011, mostly because I have a high expense profile (live in North Jersey, 4 kids, etc). My trading has always been profitable, just not profitable enough. I've been trading options since the '80s.
    I did go down to part time at my day job (12 hours/week) in 2015 and am lucky enough to work these hour after 3:00pm eastern.
    This year, I formed an LLC to trade in. I used Paul Mann at daytradertax.com and am satisfied. He is very reasonably priced.
    There has been some very good advice imparted in this thread; I would especially heed Kevin's advice about using low gamma strategies.
  19. Mentoring wasn't mentioned yet..

    As per job. I'm not planning to keep it even as part time. I'm considering taking some projects from time to time but it will be (with big question mark) nothing more than little extra – can't put this position on income side. Later on... we will see.

    Day job is an important factor: if one is satisfied with it there is no need to change - trading will stay just a hobby no need to go full time. On opposite side if one hates his work he may find himself in bit dangerous situation because desire to change may overcome one's decision process.
    I like your stories how you get there. I listened few Trader of the Month recordings, always more enjoying to listen about traders path than about technicals itself. I know the pain of intensive learning with full time job+ that Kevin mentioned just 2 year sabbatical isn't realistic for many.

    Tony, what was the reasoning behind forming LLC for trading?

    I would like to return to capital requirements/expectations for a while. All say avg return 2%month (20%/Y) is high. I don't try to contest this statement as it comes from experienced trades and other sources: 2% is good to very good, 5% is crème de crème. Hmmm...

    Lets look at some data:

    CD Alerts:
    Amy's Nested ICondor – Avg 5.53% over 40 month (Wow!!!) - and 3.37% this year
    Amy's Weridor – 2.77% / 36m
    Bruno,s Rhino – 4.08% / 20m
    Dan's RTT – 1.49% / 12 m
    Jim's Kevlar – 7.17% / 12m
    Baby Rhino - ?

    Other trades I remember:
    AKJ's trade – 8.55% /3 m
    Paul's 'weekly M3' – cant find data but it was high number
    Fruit Fly Trade - ? I have only backtest results

    JL's basic trades:
    M3 - ?
    Bearish Bfly - ?

    If somebody has missing data/other strategies please enter. I omitted Ron's STT on purpose.

    I'm aware of saying not to confuse bull market with brain. I'm also aware of weakness of presented data (short period of samples, all data from same market period etc.), I believe there is strategy for each market. I'm using them as a ballpark to show that data are tend to be better then 2%.

    Using Paul's math: to get avg $1000/m one has to put 100K into account: 50K as backup and 50K as working capital which will be close to capital at risk. Let's leave backup alone for now.

    $1000/m ← 50Kx2%

    I see discrepancy between used 2% and strategies' data. Again I'm not saying that 2% is wrong, more likely I'm wrong assuming 3-4% but I can't see why I'm wrong. Is it that hart to recognize changes in market then modify bread and butter strategy or scale down for time or introduce small strategies for opposite market? Many possibilities and yet from practitioners we have 2% as decent return (Dan even suggested 1% for first two years).

    Maybe my point of view will be better understand and answered if I explain where I'm coming from. I traded weeklies for a while with 8-10% profit goal. Traded small. Results weren't too bad I tried to increase trade size but couldn't get satisfactory consistency. (Trading weeklies while working full time+ :) ) Then I found CD and my perspective changed. Point is I'm getting to this 3-4% from top not from bottom and I'm puzzled of uniform stand at 2%. What I'm missing?
  20. many of the strategies you mentioned, mine included, have a tendency to experience big losses in the left-tail of the return distribution. In fact, a big source of the long-run returns come precisely from the shortage of investors willing to take on this tail risk - therefore those willing to shoulder the risk are paid a premium.

    You can be humming along for months-on-end generating 3-4% or more, but my eyes are wide open to the fact that a 20%+ drawdown could be around every corner. These drawdowns really hurt your long-run CAGR.

    I do not and have never traded for a living, but just within the last year and a half, I can recall conversations of traders pulling their hair out over Aug 2015 flash crash, Jan-Feb 2016 selloff, March 2016 rally, BREXIT, and US elections (selloff and rally). These are all pretty mild compared to the volatility around Tech bubble, Financial Crisis, Euro debt crisis, Debt ceiling, 2010 flash crash, etc. If you traded these events poorly, any and all could have put a sizeable dent into your portfolio.
  21. About taxes, has anyone looked at / used master - feeder offshore structures to do things like avoid UBTI or adjust effective tax rates?
  22. 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.
  23. 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.
  24. 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
  25. 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!
  26. Jim....good wit and excellent advice. I hope that starry-eyed traders dreaming of Teslas, mansions, and evenings spent among the glitterati take your advice to heart. Trading can sometimes be more akin to mud wrestling than neurosurgery.
  27. 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.
  28. 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.
  29. Tim: Do you lose 60/40 tax treatment for 1256 contracts when trading in a C-corp?
  30. 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.
  31. 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.
  32. 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.
  33. 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...
  34. 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.
  35. 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 ?
  36. Are you talking about Reg-T or PM/SPAN margin? If Reg-T, it seems like an average return.
  37. Yes that's for Reg-T
    I am going to aim for that and see if I can make that every month
  38. Best of luck. Have you decided on the strategy or trades ?
  39. 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.
  40. 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.
  41. 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
  42. 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.
  43. 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.
  44. 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
  45. How long has full-time trading been your sole source of income, Marcas?
  46. 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.
  47. Thanks for the clarification. I agree with your comments.
  48. 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.
  49. 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 ?
  50. Yes, primarily I transitioned from a high gamma to low gamma trade.
  51. I assume draw down here means withdrawing the capital used for trading for living expenses etc . Is that correct ?
  52. Yes