Imagine a major league baseball game, where your favorite team gave up no runs for the first eight innings and then twelve runs in the ninth. Are you happy if the opposing team gave up one run in each inning of that same game? Of course not. The opposing team won 12-9. Yet the opposing team “lost” each of the individual innings but ultimately won the game. So the final score is far more important than the individual outcomes in any one inning of a baseball game. In fact there is no concept of winning an “inning” in baseball. You either win the game or you lose it.

In monthly options spread trading, there is a tendency to want to “notch” a win for a particular trading strategy in any given month even if it is a small win. There is a natural tendency in all of us to want to view our efforts as a success, even if they yield only a minor success. But the reality is that the minimum time period over which a monthly options spread  strategy can be judged is twelve months, and most would argue more like 24-36 months. And so whether a month is a positive month or a negative month is far less important than the size of the gains or losses over the period that you are measuring the effectiveness of a strategy or trading style.

It goes without saying that an annual gain/loss ratio of  9/3 is wonderful to brag about at parties, but if the average gains are + 5% and the average losses are -15% you would be bragging about a 0% return strategy. On the other hand if the average gains are +4% but the average losses are -2%, then your strategy would yield more than 30% annually.

So the size of a gain or a loss in options spread trading  is far more important in the long run than whether an outcome is positive or negative in any given month. Traders who hold out for a 1% gain, to improve their win/loss ratio and their bragging rights at parties, will often do so at the risk of taking a very large loss if something adverse happens. This exposure exists very often towards the end of trades when the trader is down a percent or two on the trade and foolishly holds out for a possible 1% gain  if everything goes perfectly, yet ignores the very high gamma risk that is present in expiration week for most spread  trades. Traders in this situation are often risking the very real possibility of a 10% or greater loss for a  lower probability 3% improve-ment. Not a good idea.

A far better idea would be to close the trade at a one or two percent loss and apply your capital to the next month’s trade where the risk/reward trade off  is in your favor.

At the end of the day a 1% gain or a 1% loss will not  alter your annual returns very much at all. But risking a realistic 10% loss for an improbable 1% gain will kill your annual returns in the long run, regardless of how many “innings” you win along the way.