What Does It Take to Make 10% Per Year? (Part 3)

Today I continue with an e-mail correspondence I had a few years ago with another trader about total annualized returns.

She responded:

> First, I think you are absolutely right to point out that when thinking
> about total return, you need to include cash held aside for adjustments.
> Maybe my use of the term “far more” was overly optimistic. It certainly
> was not very precise! I believe that 18% per year is “far more” than 10.
> So lets use 18 for a reference. Someone trading a $100,000 portfolio
> would need to make 1500 per month to reach that goal. Using only bull
> puts and bear calls that make 10% return-on-risk, you need to risk $15K
> per month to net that amount. That leaves plenty of cash for adjustments.
> Of course, not every trade will work, but 10% is the minimum I look for
> in a credit trade. That also leaves plenty of cash for longer term, less
> risky trades like collars where you can safely put more then 2% at risk.
> A careful use of margin could increase the likely returns.

I responded:

> You say “someone trading a $100K portfolio would need to make 1500 per
> month to reach that goal [18%].”
>
> Here’s my first question: what is the total net worth? I think a common
> fallacy is to quote returns on dollars traded. Making $1K on $10K is
> much different for someone who has $10K to her name than it is for
> someone who has $1M to her name. The former individual may face
> tremendous fear, stress, and sleepless nights. If the latter
> individual “lost it all” then she would still retain 99% of her net
> worth.

I will conclude with the next post.