Tales of a Technician: Return on Time Invested Redux
November 22, 2021
Today I want to revisit the concept of Return on Time Invested (ROTI) as it relates to managing naked puts and bull puts which are the most common strategies I wield in my Team Phoenix Trading Lab.
Some traders use the following phrase to articulate their trade management objective:
Maximize your gains and minimize your losses.
The oft-quoted aim of the typical trader
At first blush, the statement seems smart. Make as much money as possible when you’re right; lose as little as possible when you’re wrong. It makes sense you realize the math behind being profitable. The sum of your winners must be larger than the sum of your losers.
But there is another angle that must be examined.
Time.
Or more specifically, the time you’re in the position.
We can all agree that making $100 is better than making $80. But what if we add the element of time? Which is better?
- Making $100 in 30 days.
- Making $80 in 10 days.
To state them in them like terms, we need to calculate the profit per day or PPD. The formula is:
Total profit / # of days in the trade.
PPD foruma
Now, let’s restate both profits in terms of PPD.
- $100/30 days = $3.33 per day
- $80 / 10 days = $8 per day
Note how identifying the answer just became easier? Capturing $80 in ten days is far more attractive than pocketing $100 over thirty. There’s an implication here that we shouldn’t gloss over. It is this:
If I make $80 in ten days, all I have to do is capture more than $20 over the remaining 20 days to come out with more overall profit than if I remained in the position and captured $100 over 30 days.
Active traders who focus on maximizing ROTI virtually always exit if they capture a good chunk of the potential profit quickly. Then, they look to redeploy the capital and do it again.
I’ve said this before but there are two ways to make more money. The first is to increase size. That is, to bet bigger. The second is to increase frequency. In other words to trade more often. Think of it as increasing the turnover of your account. If I can take the same $500 and redeploy it in three trades over a single month’s time instead of a single trade, then I have the potential to capture greater overall profits.
How it Relates to Naked Puts/Bull Puts
Here are the three profit targets I use:
- Ride to expiration and let the position expire worthless (i.e., capture 100% of max gain)
- Close the trade when I capture 80% to 90% of max gain.
- Close the trade if I capture 50% to 60% of max gain quickly (i.e., within < 20% of the time to expiration).
The first rule effectively maximizes the gain of the trade, but it does so without caring at all about the amount of time it takes.
The second and third rules instead focus on maximizing the return on time invested.
I most often use the second target. I’d love to use the third one the most, but it’s uncommon to nail the timing so well that I make a large portion of the reward quickly.
AAPL Example
Here’s an AAPL example using a trade we just exited in my Phoenix lab on Apple.
On Nov 17th, AAPL triggered a bullish breakout and we entered a Dec 145/140 bull put spread for 59 cents credit. The options had 30 days to expiration.
Five days later, on Nov 22nd, AAPL rose enough to push the spread value down to 10 cents. We exited to lock in a 49 cent gain.
What was our Profit Per Day (PPD)?
$49 / 5 = $9.80
What would have been the PPD if we remained in the entire 30 days?
$59 / 30 = $1.96
By exiting early, we juiced the return on time invested and freed up the capital to be invested elsewhere for the remaining 25 days. The hope is that we gain more than the remaining $10 over the next 25 days. Given that we just captured $49 in 5 days, I don’t think asking for $10 over the next 25 days will be difficult.
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