how to figure percentage profit target for a butterfly?

Discussion in 'General Discussion' started by whitemare, Aug 1, 2017.

  1. whitemare

    whitemare Member

    Hello all, I am new to the group, and happy to have found such a knowledgeable assembly.
    I am starting on some of the 30 day and longer butterfly trades, and not sure what profit targets are appropriate.
    Should they be a percentage say 5-10% of the margin held, or something else? How does the number of DTE days to expiry affect the percentage one should aim for?
    Is rate of return then best figured against margin held?
    thanks in advance,

  2. Tim

    Tim Well-Known Member

    Hi, I measure mine in two ways: % return on maximum actual margin used at any time during the trade, and in $ per lot.
    Margin in use (reg T margin, even though you might have portfolio margin the real risks is the reg T margin) (as calculated by TOS. Different brokers margin broken wing butterflies differently, for example at one other broker the reg T margin is three times what it is at tos). Since margin in use varies during the trade, depending on how you are adjusting it, by using the highest margin ever used in the trade you are measuring the highest risk and when the trade is done you have a reasonable return on capital.

    Some use "planned" margin, which is an arbitrarily chosen number based on experience and allocation. Acrtual margin may be more or less than planned capital, and so if you report your return on planned capital it isn't a "real" number. Only indicative. But I do understand the reasons people may use this.

    So if you made $1000 on maximum actual margin in use of $30,000 for a 10-lot butterfly, your return is 1000/30000 = 3.3%. We don't know if that is high or low until you annualize it since some trades you are in for say, 23 days and some 44 days. Making $1000 on each of those will have very different annual returns. Annual returns are the only good way to directly compare different trades and strategies.

    The formula I use (even though my business school professors would argue with me) is:

    (Return / max margin) * (365/Days in trade)

    or, ($1000/30000) * (365/23) = 53% for the 23 day trade and
    ($1000/30000) * (365/44) = 28% for the 44 day trade.

    Return on capital doesn't show you how well you are making the trade however. Nor does it adjust for duifferent sizes of trades like $ per lot does. So in the above example $1000 / 10 lots = $100 per lot. If you know from your backtesting, or the strategy's creator, or your experience what the average $ per lot is then you know if $100 per lot is high or low. This can show you if you are trading the strategy well or not. And, knowing a reasonable $ per lot return will allow you to develop a business plan of how much capital you need to make a certain income, and determine how many lots to trade per month to make an income goal. Hopefully, over time you should see your $ per lot rising even if annualized return isn't.
    PK, Luke and Paul Demers like this.
  3. whitemare

    whitemare Member

    Thanks for the very educational answer!
  4. PK

    PK Well-Known Member

    I like a lot the differentated answer from Tim. It depends a lot what you want to measure with your % return. For me the average return per lot with a given strategy has been very useful to monitor my progress towards consistency and improved trade mangement (trend towards increased return per lot AND - more importantly - towards lower standard deviation from the mean; i.e. rather constant returns w/o big losers). When you to start thinking about trading as a source of income, the % return over your "working" capital per month or per year - and the absolute return - may be more important. I am trading ES option futures and my return over margin is fabelous. BUT, at least in the current low volatility environment, margin is usually only one third of my capital and I start agressively scaling out positions as soon as margin reaches 2/3 of my capital. And I am only using about one third of my liquidity for trading. Together, this means that sometimes only one tenth of my "immobilized" capital is "working" for me. Thus, fabelous 2 digit returns over SPAN margin end up adding only a few % to my "immobilized" capital per year. Maybe I am to conservative, and - as yet - this way of going for "safe" returns has prevented me from abandoning my job; just simply because the absolute return per year, being so conservative, is still not enough to make my living.
    Luke likes this.
  5. Marcas

    Marcas Well-Known Member

    And, Peter, for how long are you trading this way, if I may ask?
  6. PK

    PK Well-Known Member

    I started trading futures options systematically with this conservative focus in 2013 . Since then yearly returns over my options trading capital are in the 20% range, which is a very moderate 7% over my overall liquidity (trading capital + capital reserve in "safe" low to no-yield investments + play money for occasional intraday trading ). My capital curve has become almost a straight line and returns very constant once I centered trading on the RTT (now my main focus) and OTM verticals (long term parking trade style) and abandoned other more "exciting" experiments with weekly ATM butterflies and calendars. Over the past 4-5 years, I slowly scaled up maximal portfolio risk from less than 10k (1 small vertical) to 90k (5-6 overlapping positions). Before 2013, I spent almost 10 years hopping from one trading strategy/instrument/ time frame to the other, making good money for some weeks or even months just to give all the profits (or more) back in a few days; start again and repeat the cycle without going nowhere. I was a slow learner and needed almost 10 years to find my way (not necessarily a good way for others in different circumstances) of trading. This forum, and in particular Dan and Tom sharing their invaluable experience in their RTT class, have helped me a lot to improve. :)
    Last edited: Aug 17, 2017
    monaco100, Frank and Luke like this.
  7. whitemare

    whitemare Member

    PK by OTM verticals do you mean debit spreads or far out of the money credit spreads? in this environment very difficult?
  8. Marcas

    Marcas Well-Known Member

    Thanks. I thing it is challenging for trader to limit himself the way you did. I did it easier way by limiting cash amount available to me on brokerage accounts as I was afraid that at some point I would go all in.

    Excitement you mentioned seems to be important part of trading, means: monetary gains are not sole motivation. Good example be JL's The Bull trade. It has similar returns to yours and still not many trading it - it is so boring. When I learn about this trade myself, couple years ago, I thought it will be my bread and butter for a while – never was.
    My 'jumpy journey' lasted about as long as yours so I'm slow learner as well. I didn't earn much in that period but I consider it valuable because I learned how I want to trade and how I don't. Ofc, income is important but if I was to trade The Bull I'd rather write algo to do all job for me. And you too still have your 'play money' for some ego building excitement : )

    Again thanks for sharing. Traders approach to trading is in my interest and I'm constantly learning.
    PK likes this.
  9. Ice101781

    Ice101781 Guest

    I use a very similar metric, with two changes to the first factor:

    [(return in dollars - fees) / (average maximum risk)] * (365 / DIT)

    I think 'average maximum risk' is a better input for determining yield for the simple reason that any trade adjusted before expiry will have different levels of maximum risk at different times. This formula also naturally reduces to 'maximum risk' in the case where no adjustments are made. Suppose you're in a trade for thirty days where two adjustments have been made. The expression for 'average maximum risk' might look something like this:

    ((7*20000)+(11*26500)+(12*14300)) / 30 = 20103.33.

    Also, why would your business professors object - because the above metric doesn't account for differences in the volatility of returns?
    Last edited by a moderator: Aug 5, 2017
  10. Carsten5000

    Carsten5000 Member

    @PK ... Are you using the RTT Service foryour RTT's or just the basic ideas with "own" rules and adaptions for your trading style?
  11. PK

    PK Well-Known Member

    Hi Carsten,
    since beginning of this year, I am a subscriber of the RTT alert service and follow the way of trading Dan & Tom teach so excellently in their weekly reviews. I learned a lot in these months and my trading improved notably. But in general I do not stick to the daily alerts and my positions may look quite different in terms of entry date, strikes, lot size, adjustments, hedging, PnL etc. With this modifications I do not pretend to improve the RTT but to adapt it to my psychology, personal circumstances and background without altering the heart & spirit of the RTT.
    KS likes this.
  12. Carsten5000

    Carsten5000 Member

    Hi Peter,

    thank you for your detailed answer.



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