Employing skill and caution when engaging in options trading can generate consistent monthly income while defusing risk, leveraging the minimum amount of capital, and maximizing return on investment. Options can enhance portfolio appreciation in an array of different market scenarios. Over the past 13 months (May 2020 – May 2021) and 275 trades, a win rate of 98% was achieved with an average ROI of 8.0% and an overall option premium capture of 85%.
The performance of an options-based portfolio demonstrates the stability and flexibility of options trading to drive portfolio results with significantly lower 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 the 13-month post-pandemic bull run, 58.2% and 61.8 per cent, respectively. Posted a return of % (Figures 1-5).
Despite these results over the past 13-plus months and 275 trades, limitations and challenges come with any trading system. In particular, acts of nature, legislative and regulatory actions can put options trades at risk. Here, I’ll walk through five trades that resulted in losses and the underlying reasons why these were beyond any remedial effort. Legislative and regulatory risk are two areas that pose some of the greatest company-specific and/or sector-specific challenges.
Figure 1 – The overall options used from April 2020 to May 2021 are available via the ticker a via business notification service
Figure 2 – Overall option metrics from May 2020 to May 31, 2021 a . are available through business notification service
Figure 3 – Overall option metrics from May 2020 to May 31, 2021 a . are available through business notification service
Figure 4 – ROI per trade over the last ~275 trades a . available through business notification service
Figure 5 – Percentage capture premium per trade over the last ~275 trades available via a2 business notification service
Baba, C, CVS and FB
In the last 275 trades, there have been 5 losses due to legislative and regulatory issues. Alibaba (Saint)handjob Citigroup (C) – (twice), CVS Health (CVS)handjob and Facebook (fb) All were targets of some sort of legislative and/or regulatory risk. Alibaba was subject to Chinese regulatory threats, Citigroup was fined by regulators with increased oversight, CVS Health was in the crosshairs of the pharmaceutical drug pricing debate and the Affordable Care Act, while Facebook was continually threatened with rules over its business model was.
Stuck in an options contract yields non-optimal options in all these scenarios. Often these threats lead to a drop in size and cause stocks to move far beyond their expected range. When faced with these exogenous events, it is prudent to absorb the loss and move on to the next trade. No one knows how long these challenges may last and weigh on the underlying stock of interest. Rolling these trades might not be the best approach for you, so I decided to take a loss and move on to other trades.
10 rules for agile options strategy
During the 13 months following the pandemic, a disciplined approach to an agile options-based portfolio has been essential to navigate pockets of volatility and prevent market declines. A set of protective measures must be deployed if options are used to drive portfolio results. When selling options and managing an option-based portfolio, the following guidelines are essential:
1. Trade a wide range of unaffiliated tickers
2. Maximize Field Diversity
3. Spread Options Contracts at Different Expiry Dates
4. Sell Options in High Implicit Volatility Environments
5. Manage winning trades
6. Use defined-risk trades
7. Maintains a ~50% cash level
8. Maximize the number of trades, so that the probabilities match the expected results
9. Put the Probability of Success in Your Side (Delta)
10. Appropriate Position Size/Trade Allocation
Apart from the 10 rules mentioned above, other general guidelines that are recommended are as follows:
• Avoid earnings related incidents
• Avoid concurrent options trades on the same underlying ticker (if concurrent trades are placed, ensure sufficient time between expiration dates and use different strikes)
• Avoid strike widths wider than ~$5 (rolling trades become more viable and will provide better opportunities to close trades)
• Leverage technical analysis to aid in trade selection, such as the RSI and Bollinger Bands (this can help identify the ideal trade type to choose from, such as iron conductors, put spreads and call spreads)
Controlling systemic portfolio risk while generating equal or better returns can be achieved in a beta-controlled manner through a blended options-based approach where 50% of the cash is held in conjunction with long index-based equities and an options component. is done. It is this volatile, company-specific risk that presents a major challenge when using options to drive portfolio returns. Often these threats lead to a drop in size and cause stocks to move far beyond their expected range. When faced with these exogenous events, it is prudent to absorb the loss and move on to the next trade. No one knows how long these challenges may last and weigh on the underlying stock of interest.
Annualizing pandemic lows with an options-based strategy during September 2020, October 2020 and January 2021 has been important and 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.
Disclosure: The author does not hold shares in any of the mentioned stocks or ETFs. However, 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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