In this video, I’m going to talk about the high win rate that you always see touted on Youtube. Youtube instructors are always talking about how they have these high win rates. Why do Youtube instructors tout high win rates? And do high win rates mean that money is actually being made?
Typically, traders start their journey watching CNBC and they look to the talking heads to give them a story about why a stock will move up or down. Then after trading based on the CNBC fundamental stories, they realize their picks are good about 50% of the time. Then some traders move on to technical analysis with a goal of reaching a higher win rate. They spend time learning chart patterns. And they think that if they spend time learning about charts, they’ll have an edge and they’ll be able to get a higher than a 50% win rate because others will be left behind; the others that don’t study chart trading. After a while, they’ll use the charts and they’ll find that their win rate is still around 50% of the time. And after this point, their thought process is all about increasing their win rate. They think that if they can just get their win rate up over 50%, they’ll have an edge.
Now, as these traders search Youtube for ways to get higher win rates, they find instructors touting 80% or 90% win rates. And they think: wow, 90% win rates–even if this guru is fudging the truth a little, if I can get the 60% or 70% win rates–I’m gonna have an edge and make a killing. And when looking at these win rates, the trader learns that they need to make a major shift and they need to learn about trading options. And they’re willing to make this shift, because they believe that if they make the sacrifice to learn about options that they’ll be taking a major step up in education that others aren’t willing to make. They can join those few willing to make that sacrifice to learn about options then it will surely lead to an edge.
When it comes to options, win rates are not nearly as important compared to when trading stocks. If you can get a win rate up over 50% with stocks and manage money around that correctly, you have pretty much found an edge. With options it’s a different story. With options, the average win amount is just as important, or more important, than the actual win rate.
For example, if you win 80% of your trades with an average win of $15 and an average loss of $70, this would be a losing system. Even with that super high win rate. So for example, you would have eight wins at $15 (which would be $120 to the positive) and two losses at $70 (which would be $140 to the negative); which after ten trades equals a loss of $20. Now, most options trading gurus talk about the nice large win percentage; like 80%. But what they don’t tell you, is how large the losses are 20% of the time. The only way to get to a higher than 50% win rate consistently is by selling options not buying options.
And in my book, I go over the four market types for option premium sellers or option sellers. And #1: the bull market; #2: sideways; #3: the grind down; #4: a crash market. Those are the four markets you need to understand when you’re selling options. And the key is this: you may be able to win 80% of your trade selling options in a bull or sideways market and even possibly in a grind down market. In fact, you may be able to be profitable in those markets where your average winner with more occurrences outpaces the average loser with the lower occurrences for an overall gain, but what about the crash market?
The last three crashes occurred on August 15,2015; February 5, 2018; and March 2020. This is what your high win rate guru does not want to talk about. They will avoid talking about a crash and they possibly never even experienced the crash or they never back tested their system through a crash. They might not even know what’s going to happen in a crash or they’re just avoiding it altogether on purpose.
Let me show you an example of a very popular trading network called Tastytrade. Now Tastytrade has a great website with very good educational tools. In fact, probably the best in the industry and I recommend learning from them, but I don’t advise trading like them. And the reason they’re a great place to learn has to do with their business model. And they’re motivated to teach you everything they know about options because they don’t make money with a course so they don’t have to hide information then put it behind a paywall. They make money as a broker so it’s to their economic advantage to share as much information as possible in order to get you to trade on their platform. And there’s no reason to hold anything back regarding basic or intermediate options trading. They do not teach advanced options trading because that would hurt their model. I will get into details about this later in the video.
Now, the high win rate of trading options that the gurus use can pretty much always be traced back to Tastytrade. They’re basically copying the Tastytrade trading method. One of the best ways to know how a high win rate options trader performs is to track one of those traders P&L during a crash. And I was able to gather some real P&L of a Tasty trade instructor over the March 2020 crash. The instructor that had some March 2020 archive material is Jim Schultz and his show was called From Theory to Practice. The basic Tastytrade method is to use many different trade structures and small positions to sell option premium. They like to open positions based on IV rank. Meaning they like to wait to sell premium when the volatility is elevated and they even advocate selling naked shorts. The trade method is supposed to be non-directional; but about 5% to 10% of the time, maybe it’s only 1% of the time.
All it takes is once for all the trade structures to become directional and correlated in order to become a major problem. This correlation happens in what I refer to in my book as crash correlation. And that is when all assets become correlated. And this is very dangerous for an options selling high win rate portfolio, because when this happens the portfolio is no longer diversified. And when you have a bunch of uncorrelated small positions and the market crashes, they combine to become one large directional short Vega position. These correlated positions can take down your portfolio. This is a weakness that gets exploited with this high win rate system and it creates high drawdowns. And if the market does not recover, they can create unrecoverable drawdowns.
Now, next, I’ll get into Jim’s portfolio.
(Audio: Jim Shultz): “What I’m going to do is I’m just going to close it. I’m just going to close the trade. I’m just going to lick my wounds and I’m just going to move on. And so, let’s go ahead and do that. This is obviously going to be, you know, a very undesirable closing trade. Right? When we put this trade on, I can assure you we did not sign up for or we didn’t think we were signing up for, you know, closing out of an eventual straddle for a $32 debit. But once again man, this is, you know, it happens. You know, we’re in… This is what? 5, 10 standard deviation move. I mean, this is crazy, right? This is the outlier of the outliers…”
Next, I want to get into Jim’s portfolio. And here, you can see he started with $30,000 in the beginning of the year.
(Audio: Jim Shultz): “…And my portfolio size, you know, well at least–I mean–to start the year was $30,000. It’s probably a little bit less now…”
Now, here is a spreadsheet I put together on the positions in Jim Schultz’s portfolio in March of 2020. And you can see the portfolio on March 6th. You can see what was happening on March 6th, that the portfolio was down around 25%. Then after that, the portfolio was not addressed again until March 23rd. So I don’t have any data. That’s why I have the dates up here–March 6 and March 23rd–he was on fraternity leave; can’t really tell from looking at this spreadsheet. But the following positions were dropped from March 6th till the 23rd. And that was $EWZ, $GDXJ, $GLD, $IWM, $MSFT, $TLT and $XLU. So those stocks that I just mentioned, when he came back on March 23rd, were no longer in the portfolio. He did go over two of those seven that I just talked about. And on two of those seven, he closed those on March 18th and March 19.
So that left me with these five positions, here. These five positions kind of extrapolate, you know, what happened to those, because he never referred back to those positions in the future. Like, from March 23rd on, he never referred back to what he did with these positions. These five positions were $EWZ, $GDXJ, $GLD, $IWM, and Microsoft ($MSFT). So I had to extrapolate what happened with those. And so, the best thing that I could do was extrapolate that those were also closed on the 18th and the 19th. Now, I had to go back and take $GDXJ. I had to go back to find out when that position was put on, whenever that position was adjusted, and then I had to figure out how much premium was collected. And then I had to estimate, you know, based on closing it on the 18th or the 19th, and I took the best case scenario. So if it was down on the 18th by $3,000 and it was down on the 19th by only 2,000, I just closed it on the 19th. I gave them the benefit of the doubt. I gave him the most favorable close. And you can see, these are the estimated losses right here. These five. So that was the only way I could really break down this portfolio and get legitimate, or as close as I could, to legitimate P&L. I wish they would just show their P&L but they don’t. So you can see that this portfolio, starting with $30,000, was down around $14,800; down 50% and that’s just giving him the benefit of the doubt. So it’s probably more than 50% down.
If you use the Tastytrade method, you can see what can happen to your portfolio. And this is what happened to Jim Schultz’s portfolio and he’s one of the instructors. So what does this mean? This% 50 drawdown. Well, you can see the cost of drawdowns here. His portfolio is down 50%. Therefore, he needs to make 100% return just to get back to even. Jim’s portfolio is an ideal representation of a high win rate portfolio. The ones that are always touted on Youtube.
I haven’t seen anyone bring out the specifics of the downsides of the high win rate trading method and I believe I’ve provided evidence that the trading method is dangerous for a portfolio. In fact, in some cases, it can take your account down 50% or more within a short time period, and I made this video to bring caution to this type of trading. One of my goals here is to prevent people from just blindly following the high win rate trading method. This trade method has serious flaws and I hope I’ve explained it and provided enough proof to help people understand what they’re getting into before they trade like this.
Now, getting back to why Tastytrade does not get into more advanced options trading techniques. First, I’ll define what is a more advanced trading technique. Well, it’s using second order Greeks to maintain neutral Gamma and positive Theta. It’s also being proactively hedged for a crash. It’s only trading two to five times per month. Now, Tastytrade wants traders to create a lot of occurrences; more occurrences means more trades; more trades means more commissions; which means more revenue. Advanced option structures do not need a lot of occurrences and they don’t need a lot of adjustments.
If Tastytrade focuses on advanced structures, their revenue could fall by up to 90%. This is most likely the reason Tom Sosnoff claimed that he didn’t understand the weighted Vega concept when I emailed him about it. I believe he’s very smart and smart enough to understand the weighted Vega concept. But that concept would bring him into the second order Greek world and the advanced trading world, and that methodology could hurt his business model. And I do want to say that Tom and Tastytrade are providing a good service by helping people learn the basics about options for free, and they do a really good job at it.
So what can you do? What if it was possible to have a high win rate, around 80%, and have higher wins versus losses in a crash? Well, this can be accomplished with a Premier Level 5 Trade Alerts. According to the back-test, the win rate is close to 80%–which is fine. It’s just like everybody else but the losses are only about half of the wins. So for example, if I win $100, I may win $100 80% of the time. When I take a loss 20% of the time, the losses are only around $50.
Now, the forward-test, or real money, was started on April 8, 2022. And as of making this video on June 20th, the live account has made seven trades; with three wins, two break-evens, and two open positions. And the current open positions are combined approximate breakeven right now. So with the S&P 500 down 17% since the inception of The Premier Level 5, the account is up around 2.50 %, and that’s including all commissions and slippage fees. So if you’re interested in proven results with real P&L being shown and low drawdowns and you have some experienced trading options with at least $30,000 in capital, I highly recommend The Premier Level 5 trade alerts. You can see a link in the description to get access.