Thinking about options trades, let’s say you aimed to double your money on each trade or it goes to zero when the option expires. What win rate and bet size do you need for this to work?
Ramping win rate from zero (bottom) to 100% (top), risking 1% of bankroll per bet on the left to 10% on the right, and compounding 30 such bets you get this distribution.
Green: you double your money (or more).
Red: lose everything.
Black: meh. unchanged or somewhere in between.
Note the lucky green idiots scattered in the sea of red, and vice versa. Pretty bad odds until you have a high win rate and a fairly big bet size.
OK let’s instead fix the bet size at 10% of the bank roll and range from double to 3x on a win (left to right):
Now what if you quit while you are ahead? If you have doubled your money, recognise that you are a lucky idiot and stop gambling - a few more lucky idiots survive:
When in doubt: chicken out. If you are down 20% call it quits.
A lot more meh but bit less scary right?
What are the takeaways? You need large winners, and high win rates and even then you still kind of need to be a lucky idiot.
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