The Number 48 and How it Can Help You Beat the Market.

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I learned this from a man I idolized while learning to trade named “Phil Town” I have never seen this elsewhere on the internet, and I hope he doesn’t sue me for this. But when using Bull Put Spreads finding a 48% ARORC (Annualized Return on Risk Capital) will be a game changer.

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First, what is ARORC - it’s simple, let’s start with RORC (return on risk capital): the amount of money you make vs the money you are staking to make it. Say you sell one $10 strike put and it returns $100, you are risking $1000 to make $100, so, therefore, you are making a 10% return on your capital risked. 10% RORC. Now to find ARORC, just add the A (Annual), so you Annualize that return by multiplying by the amount of times you could execute it in a year. So if that $10 put had a 30-day exp, you would be able to do that trade 12 times, so your annualized return on that $1000 staked (if you repeated that trade successfully for 1 year consecutively) would be 10% x 12 = 120% annualized return on risk capital (ARORC).

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Every options contract or strategy has an expiry date, so just take the return you are making off of your capital risked and multiply it by as many times as you can fit that trade in 365 days. Being able to find ARORC is great for strategizing your positions and portfolio.

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Now what about the number 48?

A 48% ARORC is the most optimal ARORC to achieve while trading Bull Put Spreads, anything over it - you are getting too greedy by getting too close to the money and risking loss, anything under it you aren’t getting a good enough return on your dough. Now, the exact science behind this number I can’t explain, but I can explain some case studies and logic. (It is rare to find exactly 48% but the closer you get, the better).

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Specifically for Bull Put Spreads I use this, but it can be used for Iron Condors, Bear Call Spreads, and I am sure a bunch of other selling strategies, but I only have real market experience in Bull Put Spreads.

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When setting up a Bull Put Spread, you are trying to find the perfect balance between Profit, and Risk. I never place trades with strikes less than an 80-90% probability OTM or greater than a .10 delta and usually look at 7-60 day expiries with 30 days being my go-to.

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But the closer you go to the money, the higher RORC you will achieve, but your probability of a losing trade goes up (higher risk, higher reward) but, losses on BPS’s are catastrophic, and you don’t want to play with fire.

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We want to achieve 48% ARORC, in most cases, it will line you up perfectly with strike prices of roughly 80-90% OTM, and that still will produce a solid return of 48% yearly on the risked money. An 80-90% chance of your trade winning and making 48% off the money risked for it, is a damn good play & statistically over the long run, the most profitable risk/reward.

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BPS losses hurt. So less is better in these cases, in the long run, the small consistent wins will lap the big wins that incur occasional losses. Stick to aiming for 48% ARORC. DON’T GET GREEDY.

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However, if you are setting up your BPS and looking at the strikes around the 80-90% OTM mark and the profit of your money risked is less than 48% annually, the options may not have enough IV and you should probably move on to another chain or equity. Now generally on options with good IV, when you find that 48% ARORC, you’ll fall in the perfect zone with strike prices 80-90%+ OTM & a good chance at winning, and a solid margin on your money.

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Finding BPS strikes with 80-90% OTM and less than .10 delta isn’t exactly the dream, I always look for price floors and chart it out. I like to find strikes two floors below the current stock price, giving me layers of safety and a better chance at winning. Because, as I stated above, losses hurt on these trades, a loss can set you back 4-5 wins, always have some backup on your BPS, like floors, bullish news, or maybe the equity just tanked and IV is high and paying good premiums miles OTM.

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I have back-tested BPS with 30-day exp, 90% OTM strikes, 48% ARORC, and strike price 2 floors below, with bullish sentiment on the equity (not in debt or failing company) every month for 10 years and out of the hundreds of trades I only found few losses.

Another thing is, if your BPS loses one month, unlikely it will fail the next month due to the inevitable high IV and favorable options premiums far OTM. I hope that wasn’t too fucking confusing, but for all who trade options, you’re welcome.

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‍That’s All Folks

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Thank you for reading. Like usual. Not financial advice.

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Cheers,