Three years on, I expanded a rule from my own book

A sentence I wrote three years ago

In the book I published in 2023:

"The ratio of risk taken to reward targeted should be at least 1:3. Which means one win can carry three losses."

I still believe that principle. I just should have written one more line about where it applies.

It is a standard for buying options. When you sell, 1:3 is structurally impossible.

And selling is what I do every day now.

Why it can't be done on the sell side

Take a credit spread. The math is simple.

Say you build a 5-point-wide spread and collect 1.90 in premium. (Index options: 1 point = $100.)

max profit = premium collected     = 1.90 × 100 = $190
max loss   = (width − premium)     = 3.10 × 100 = $310

Risk-reward of 1 : 0.61. You lose more than you win.

Here is the key fact:

max profit + max loss = width (always fixed)

Increase max profit and max loss shrinks by exactly the same amount. The total never moves.

To reach 1:3 you would have to collect 75% of the width in premium. Does such a strike exist? Yes — at a strike that is almost certain to lose. The market priced it that way because it is that dangerous.

In a selling strategy, 1:3 isn't impossible. When it looks possible, it's a trap.

So what do you look at — the breakeven win rate

Instead of the risk-reward ratio, use this:

breakeven win rate = max loss ÷ (max loss + max profit)

In words: the share of the total pot that you stand to lose. You have to be right at least that often to break even.

Buying

A long call costing $200 targeting $600:

200 ÷ (200 + 600) = 25%

Right once in four and you break even. That is exactly the 1:3 from my book.

Selling

The credit spread above:

310 ÷ (310 + 190) = 62%

You need six or seven out of ten just to break even.

The two worlds side by side

	Buying	Selling
Risk-reward	1:3 or better is reachable	usually under 1:1
Breakeven win rate	25%	62%
How you win	occasionally, big	often, small
How you break	slow bleed from a losing streak	one large hit
What it demands	patience	discipline

Same instrument, completely different game.

When I wrote 1:3 in the book, I was teaching long calls and long puts. In that context it was right. The problem is that carrying that principle into a selling strategy forbids every entry.

Expected value — this is the real thing

Knowing the breakeven isn't enough. What you actually earn looks like this:

expected value = (win rate × max profit) − (loss rate × max loss)

Put win rates into $190 profit / $310 loss:

Win rate	expected value per contract
85%	+$115
75%	+$65
70%	+$40
62%	0
55%	−$35
50%	−$60

This table changed how I understand my own strategy.

A selling strategy pays because the win rate is high, not because the risk-reward is favorable.

I had been targeting 85–90%. From the outside that looks unrealistically high. But when breakeven is 62%, 85% is not greed — it is barely enough margin of safety.

Three things this calculation changed

① What to do when the win rate slips

Say the win rate drifts down to 65%. Still positive. But only three points above breakeven.

The old me would have said "try harder." Now I know the answer is "take fewer entries." Below 62%, trading more loses more. The effort was pointed the wrong way.

② Why one big loss hurts so much

Winning $190 at a time and then losing $310 once erases 1.63 wins.

So in a selling strategy, how often you actually take the maximum loss is everything. Managing the win rate is survival.

③ Why this is worse on 0DTE

With same-day expiry, max loss is not a rare tail.

Held to expiry, past the strike means simply max loss. There is no partial outcome the way there is with a long option. I have had a day where several spreads I entered all settled at maximum loss.

Max loss was not the exception on a losing day. It was the default.

Three lines before you enter

Nothing complicated. Write three lines before placing the order.

① max profit         $______
② max loss           $______
③ breakeven win rate  ② ÷ (① + ②) = ____%

Then ask one question:

"At this strike, can I be right more often than ③?"

If the answer is "I don't know," it isn't an entry yet.

Closing

It has been three years since the book. In that time I moved from buying to selling far more often, and in doing so I learned how far my own principle actually reaches.

The principle still holds. I just hadn't written down where it stops applying.

The revised edition will carry this calculation as an appendix. My volume-one principle and my volume-three strategy sat unreconciled for three years — late, but I intend to join them.

The math here is ordinary options arithmetic used to explain profit-and-loss structure, not a recommendation for any security, strike, or trade. The figures are illustrative. Your decisions and their outcomes are your own.