I recently read a book titled, “25k Options Trading Challenge: Proven Techniques to grow $2,500 to $25,000”. While I’m certainly skeptical about the possibility of turning $2,500 into $25,000 I enjoyed the read more than I imagined and am considering attempting just such a strategy, maybe on a smaller scale. For those interested to read the book yourself, here is a link to it on Amazon – 25k Options Trading Challenge (NOT an affiliate link).

With this post, I want to uncover the possibility and of course the probability of such a challenge becoming successful. To do that I’ll outlay 3 different trading plans and back test those plans on Thinkorswim to determine possible outcomes. This should be fun!

Liquid ETF’s

To begin, I’ll narrow my asset base for testing down to only the most liquid options ETF’s.

They are;

• QQQ – Nasdaq 100
• SPY – S&P 500
• TLT – 20 Year Bond
• GLD – Gold Trust
• IWM – Russell 2000

These assets provide the most liquid options markets currently available and are therefore capable of being utilized for any trading plan I could dream up.

Market Conditions

Next, to avoid testing into a bullish or bearish only environment, I’ll restrict all trades to the second half of 2021 and the first half of 2022. You may remember, 2021 was an insanely bullish market, while 2022 was equally bearish.

• Starting Date – July 15th, 2021
• Ending date – July 15th, 2022

Trading Goal

To keep my approach consistent for every test, the goal will be simple. Double my account.

• Account Starting Balance – $1,000
• Account Goal – $2,000

25k Options Trading Challenge Plan #1

Keeping it as simple as possible to start my testing. I’ll use a straight forward buy and hold approach. Basically, identify the trades and hold them until the very last day of expiration.

• Options Strategy – Long Vertical Spread
• Risk per Trade – $100
• Management –
  • 3 Spreads each month
  • ~30 DTE at entry
  • Nearest ATM under risk amount
• Indicators –
  • 2.0 Standard Deviation Channel
  • 9 EMA
  • 200 SMA
  • Volume
  • RSI
  • TTM Squeeze

Options Trading Challenge Plan #1 Results

Options Trading Challenge Plan #1 Final Thoughts

After reviewing the trades above, some very important items stand out.

First, I didn’t maximize my capital usage. This could have led to blowing up the account during the draw down phase but could have also maximized the upside on winning cycles. If this strategy becomes the preferred method for this challenge, using my capital more efficiently will need to be addressed.

Second, the win percentage needs improvement. However, this could simply be a by product of not thoroughly assessing each trade. Instead, I looked at each indicator very quickly before moving forward. Moreover, by using the volume profile and support/resistance I should be better able to identify market direction.

Lastly, many of my losing trades were profitable at some point during their life. Not all of them of course but finding a way to turn those losers into small winners could have made a dramatic impact. However, managing the trade is tricky business. On the one hand, I could set a stop target but that may cut potential winners. On the other hand, I could set a profit target and a stop target but that becomes more difficult and virtually impossible to maintain with my work schedule. Additionally, a profit target would knee cap winning trades as well.

All in all, the strategy was profitable and 38% in a year is certainly a respectable return. However, I wasn’t able to double the account, so for now, this isn’t the strategy I believe makes the most sense. That could change though as I move forward testing the next two strategies. Stay tuned!

Almost forgot, this test did not include commission costs which would have made a difference. Total commission costs based on my current commission structure at TastyTrade would be $54.

25k Options Trading Challenge Plan #2

For the second round of testing I’ll take a more active approach to management. After identifying a few shortfalls from the first test I’m hopeful I can improve upon those weaknesses to reach my goal this time around.

• Options Strategy – Long Vertical Spread
• Risk per Trade – $100
• Management –
  • 5 Spreads open at all times
  • ~30 DTE at entry
  • Profit Target – 75%
  • Stop Target – 50%
  • Must close 1 week before expiration
  • Nearest ATM under risk amount
• Indicators
  • Volume Profile
  • YTD Trend

Options Trading Challenge Plan #2 Results

Options Trading Challenge Plan # 2 Final Thoughts

Keeping in line with my previous recap, I used capital more efficiently but still didn’t maximize the usage. At no point throughout the back test did I utilize much more than 50% of the $1000 dollar balance. However, I’m believing that this is the happy medium between too conservative and too aggressive. After all, I was able to meet my goal in just over half the time so that’s not nothing.

Next, I was able to improve my win percentage by 7 percentage points. Which may seem insignificant in a vacuum but coupled with an active management approach where my winners outsized my losers. It made all the difference.

Moving on, by managing the trades with proper risk/reward and closing before expiration week I was able to avoid any total loss trades. This, as I see it, is where the money was made, or more specifically, its where the money wasn’t lost.

Also, no significant drawdown was experienced until I was well into the green. This may not happen in real time but if managing each trade curtails most of the large losses that will do wonders for my psyche.

Additionally, if trades are profitable a day or two before the 7 DTE mark, close them. On several occasions I had trades take a large dip at 7 or 8 DTE. Closing those trades early to realize the profit would have been impactful. I didn’t count the number of occurrences, but maybe 5 trades (give or take), that were profitable turned into a loss during that two day window and even more became less profitable trades. I didn’t keep track of which trades were negative and turned positive during that period but I don’t believe it was a significant number. Oops!

Finally, should this be the desired trading plan (and I am liking it) I’ll need to maintain the same frame of mind throughout the challenge period. I didn’t waste time deliberating over entry or exit prices, I just took what was available. Also, elimination of all the indicators was extremely helpful to just make a decision and move on. The downside, if we want to call it that, was this plan required much more work. I may have completed the challenge far quicker but it took 18 more trades and daily involvement to manage the positions. For me, that isn’t a deal breaker because I like to be engaged in the market. However, my schedule does get pretty hectic and I may not be available to manage a trade exactly when I need to, which could lead to problems.

And before I move on, total commission costs based on my commission structure at Tasty Trade would have been $81.

25k Options Trading Challenge Plan #3

For this final round of testing, I couldn’t honestly ask for more than just replicating the success from the second test. However, I’ll be turning the clock back to January 2nd, 2019 to avoid any possibility that I’m remembering market direction and skewing the results in my favor.

• Options Strategy – Long Vertical Spread
• Risk per Trade – $100
• Management –
  • 3 round trip trades at a time
  • 60+ DTE at entry
  • Profit Target – 50%
  • Stop Target – 50%
  • Must close 1 week before expiration
  • If only 1 position remains and it’s profitable, then close to reopen all positions
  • Nearest ATM under risk amount
• Indicators –
  • 3M Trend or Trend from most of the chart

Options Trading Challenge Plan#3 Results

Options Trading Challenge Plan #3 Final Thoughts

Well, it happened! I managed to replicate my real world experience with long vertical spreads but I was able to learn something from this test. I reminded myself of the importance of strike selection when trading vertical spreads.

With that, I ultimately abandoned the test early because it wasn’t looking great. If you take a peek at the results above it will quickly be made clear as to why I did. Continuing would have simply been a slow grind all the way to zero or to the end of the test year with less money than I started. Even during my short win streak early on, I never eclipsed $1200 trading this method.

My win percentage was the worst across all tests and my final balance shows it. Although, the new test period was a much choppier market which didn’t help. Credit spreads during this period might have performed better. Unfortunately however, other than volatility (which I didn’t use to make trading decisions), there isn’t a great way that I know of to determine the best time to use either type of vertical spread.

In the end, maintaining a 1:1 risk to reward ratio is a recipe for a long drawn out losing strategy. It would be imperative, if I eventually move forward with this challenge, to maintain a higher reward to risk.

Options Trading Challenge Closing Thoughts

Ultimately, the trading plan that resulted in the best performance was also the plan that required the most work. I guess its true what they say, there are no free lunches. In any case, by minimizing the number of indicators and simplifying my analysis I was able to focus on managing the positions and that really made the difference. Removing the indicators all together in test #3 didn’t help even a little and having several of them also didn’t work.

As I move forward from here I’m going to test plan #2 across each year starting in 2018 to determine viability across a longer time frame. While one year was enough to get a sense of what may work, if it doesn’t stand the test of some duration, is it really worth the effort? I’m thinking not.

Finally, If I do end up completing the challenge, I’ll need to do a few things to give myself the best opportunity at success.

1. I’ll need to maximize capital efficiency to grow the account faster. However, I won’t do that until I’m fully comfortable trading the methodology in real time. Otherwise, it would just become another risk.
2. I’ll need to maintain a spreadsheet with every trade so I can stay up to date on all the performance metrics of the strategy. This will also assist in finding other areas to improve the strategy.
3. I’ll need to consider each trades theoretical expectancy using the long vertical expectancy calculator I built into the Optionboxer Portfolio Spreadsheet. This will assist in taking trades that have a statistical advantage but in the real world that may eliminate some winners. Time will tell, but I’ve linked the spreadsheet for those interested to take a look.
4. I’ll need to find a baseline mental state. I’m not sure at this moment what that may look like but doing so would help me to return the same frame of mind for each day I trade.

Well, that wraps it up. I hope you enjoyed following along as I tested each strategy. In the day’s ahead I’ll be making a video to share my thoughts regarding this series of back tests along with my thoughts on the 25k Options Trading Challenge book. I hope you’ll head over to my Youtube channel to check that and any of my other videos out.

God bless,

Jeff