Controlling portfolio volatility and reducing overall market risk while generating better returns relative to the broader market can be achieved with options. Essential to this strategy is a mixed options-based approach where 50% of the cash long is held in conjunction with an index-based equity and an options component. Another important element is determining the probability of success in your favor and taking advantage of options decay through delta and theta respectively.
Working with skill and caution over ~280 trades and ~13 months, generating consistent monthly income while defining risk, leveraging the minimum amount of capital, and maximizing the return on capital in this option-based/beta-controlled The portfolio has been the core of the strategy. The options allow to generate consistent monthly income in various market scenarios in a high-probability manner. An options win rate of 98% was achieved with an average ROI of 8.0% and an overall option premium capture of 85%, outperforming the S&P 500. The performance of an options-based portfolio reflects the stability and flexibility of options trading. Get portfolio results with significantly less risk in a beta-controlled manner. The options-based approach bypassed the September 2020, October 2020 and January 2021 sell-offs, while outperforming/matching the S&P 500 in 13 months (Figures 2-5).
The delta serves as a proxy for the probability of success at the expiration of the option contract. Thus, this value is an absolute number; Thus, a negative (put side of the option chain) or positive (call side of the option chain) value is irrelevant. The delta interpretation is based on 1.0 less than the delta on a given strike. If the delta on the put side is -0.14, this translates to 1.0 – (-0.14) = 0.86; Thus, there is a ~86% chance of the trade being over the strike or worthless at expiration. If the delta on the call side is 0.20, this translates to 1.0 – 0.20 = 0.80, thus there is a ~80% chance of ending below the strike or being worthless at expiration. Selling options near a specific delta that is out-of-the-money puts the statistical edge in your favor. Given enough trading events, probabilities will come into play to reach their expected outcome. Thus, trading at a delta of 0.15 would yield a winning trade success rate of 85% if all trades go through at expiration (Figure 1).
Figure 1 – Option series showing the delta column and the probability of success at each respective strike price that is used for trades through a business notification service
Theta represents the time decay over the lifetime of an option contract. As an option matures at its expiration date, the time value as a function of time decreases. Theta rapidly enters the final segment of the options lifecycle; Thus, if an option is out-of-the-money and nearing expiration, the value of the option will be worthless or nearly worthless. When selling options to collect premium income, theta always works in your favor as time evaporates and the underlying security has fewer opportunities to challenge the strike price. When the time lapse is almost complete, the options can be closed to make a profit.
In total, from May 2020 to May 31, 2021, ~280 trades were placed and closed. An option win of 98% with an average ROI of 8.0% and an overall option premium capture of 85%, outperforming the broader market through the fall in September 2020, October 2020 and January 2021 (Figures 2-5) rate was achieved (Figures 2–5).
Figure 2 – Overall option metrics from May 2020 to May 21, 2021 a . are available through business notification service
Figure 3 – Overall option metrics from May 2020 to May 21, 2021 a . are available through business notification service
Figure 4 – ROI per trade over the last ~280 trades a . available through business notification service
Figure 5 – Percentage of premium capture per trade on the last ~280 trades available through a~ business notification service
Combining delta and theta, combined with skill and caution in executing options trades, can control systemic portfolio risk while matching the S&P 500 index and/or generating better returns. Delta and theta are key elements in a beta-controlled portfolio through a mixed options-based approach where 50% of the cash is held in conjunction with a long index-based equities and an options component.
The fall in September 2020, October 2020 and January 2021 reinforces why proper risk management is essential. An options-based approach provides a margin of safety while bypassing the effects of heavy market volatility as well as portfolio volatility. Delta and Theta work together to determine the probability of success in your favor by taking advantage of the time decay in your favor.
These options-based results demonstrate the stability and flexibility of options-based portfolios to outperform during market volatility. To this end, cash-on-hand exposure to long positions through broad-based ETFs and options is an ideal mix to achieve the portfolio agility needed to reduce uncertainty and volatility expansion. Better/matching returns have been achieved relative to the S&P 500, despite holding 50% of the portfolio in cash.
Disclosure: The author owns shares in AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY and USO. He may engage in options trading in any of the underlying securities. The author has no business relationship with any of the companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own views. This article is not intended to be a recommendation to buy or sell any of the stocks or ETFs mentioned. Kiedrowski is an individual investor who develops investment strategies and spread analysis. Kiedrowski encourages all investors to do their own research and due diligence before investing. Please feel free to comment and give feedback, the author values all feedback. The author is the founder of www.stockoptionsdad.com Where the option is a bet on where the stocks will go, not where they will go. Where there is a high potential for consistent income and risk mitigation, options trading thrives in both bull and bear markets. For more attractive, short-term option based content, check out stockoptionsdad’s . go to youtube Channel.
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