Tag: how to trade options

Generating smooth and consistent income month after month without predicting which way the stock market will move is the objective of options trading. Running an option-based portfolio offers a superior risk profile relative to a stock-based portfolio while providing a statistical edge to optimize favorable trade outcomes. Options trading is a long-term game that requires discipline, patience, time, maximizing the number of trade occurrences and continuing to trade through all market conditions. Put simply; an options-based approach provides a margin of safety with a decreased risk profile while providing high-probability win rates. Essentially, options are a bet on where stocks won’t go, not where they will go. Sticking to a set of fundamentals, this approach can provide long-term, high-probability win rates to generate consistent income while circumventing drastic market moves. In July, I posted a 96% (24/25) options win rate, and over the previous 10 months through both bull and bear markets that win rate percentage was 87% (199/230). Over the previous 10 months, the options-based portfolio outperformed the S&P 500 over the same period by a significant margin producing a 6.1% return against a 2.3% for the S&P 500.

What Does Life Insurance Have To Do With Options Trading?

Insurance companies sell policies based on actuaries and risk factors, then price these polices to their advantage. Insurance companies are betting on probabilities across insurance products and sell overpriced policies above their expected losses. The insurer agrees to pay out a specific amount of money for a specific loss (i.e., death). In return, the insurance company is paid monthly premiums, and based on this risk-based revenue model; it’s a very profitable business. Insurance companies sell policies with a premium cost level that maximizes a statistical edge to the insurance company’s benefit. The goal is to collect premiums over the course of the policy and never payout on the policies they sell to you. So, the probability of paying out on the policy is very low while the premiums received, over the policy lifespan will exceed your total benefit. Continue reading "What Does Life Insurance Have To Do With Options Trading?" →

Options trading is a long game that requires discipline, patience, time, maximizing the number of trade occurrences and continuing to trade through all market conditions. To this end, an options-based portfolio requires discipline and time to materialize in order to reach its full benefits when benchmarked to a broader index. An options-based approach provides a margin of safety with a decreased risk profile while providing high-probability win rates. An options centric portfolio ebbs and flows just like any portfolio as various types of trades are executed, management of trades are carried out and the inevitability of assignment of occurs. Over the long-term, this approach provides smooth portfolio appreciation while generating consistent income. Since options are a bet on where stocks won’t go, not where they will go, this is accomplished without predicting which way the market will move. When adhering to options trading fundamentals, this approach can provide long-term durable high-probability win rates to generate consistent income while mitigating drastic market moves. Following these option trading fundamentals, I’ve demonstrated an 85% (175/205) options win rate over the previous 9 months through both bull and bear markets while outperforming the S&P 500 over the same period by a wide margin producing a 4.51% return against a 0.95% for the S&P 500.

Results

The broader market has been tumultuous over the past 9 months, to say the least. In Q4 2018, the S&P 500 posted one of its worst quarters and since the Great Depression with the index selling off 14% and erasing all of its gains for the year. 2019 started off on a high note for the S&P 500 with January posting a 7.9% gain, logging its best January in over 30 years. This was followed by continued strength in February, putting the index on its best footing since 1991 with a cumulative return of 11% through the first two months and rounding out Q1 2019 up just over a 13% return. May witnessed a market sell-off which saw a decline of -5.8%. June 2019 was the best June for the Dow since 1938 whereas the S&P 500 posted its best first half of a year since 1997, notching a 17.3% gain. Sticking to a set of disciplined fundamentals through this volatile market over the previous 9 months generated superior returns relative to the historic run by the S&P 500 (Figures 1-4).

Figure 1 – Options based portfolio return (4.51%) in comparison to the S&P 500 return (0.95%)
Continue reading "Options: Long-Term Game of Discipline and Outperformance" →

Let’s discuss losers and managing options trades that move against you despite the high probability of winning the trade at the onset. When engaging in options trading, losing trades are inevitable however managing these trades via risk-defined trades, position sizing, diverse sector allocation, buying-to-close for a gain or loss, allowing assignment to occur at expiration, selling covered calls on the assigned stock and rolling the trade out to a different strike level can mitigate risk and allow long-term successful options trading. In the end, following a set of options, trading fundamentals will enable your portfolio to appreciate steadily month after month for consistent portfolio appreciation. Since options are a bet on where stocks won’t go, not where they will go, this is accomplished without predicting which way the market will move. These fundamentals provide long-term durable high-probability win rates to generate consistent income while mitigating drastic market moves. Following these option trading fundamentals, I’ve demonstrated an 86% options win rate over the previous 8 months through both bull and bear markets while outperforming the S&P 500 over the same period by a wide margin producing a -0.1% return against a -5.6% for the S&P 500. This outperformance is due in part by proactively addressing losing trades to manage the overall risk profile.

Losers Negate Winners

The goal in options trading is to leverage cash and/or stock and sell options using the underlying cash and/or stock to collect premium income. This can be performed in a high-probability manner where a statistical edge is to the options trader’s advantage. Despite the odds being in your favor, occasionally trades can move against you in a major way and negate a large swath of winning trades. Let’s say 12 trades were placed and closed with an average income per trade of $65, translating into $780 in income. If one trade goes south and assignment occurs at $8 below the strike, then this would more than wipe out the $780 in profit and result in an overall loss on the portfolio, translating into a net $20 loss over these 13 trades since options trade in blocks of 100 shares. The onus is on the trader to circumvent this situation and manage these trades before this huge loss in relation to all the option-income received. The example used above is the primary rebuttal from cynics when it comes to an exclusive portfolio driven by options trading. Even if this assignment occurs, the stock was purchased at a substantial discount relative to where the stock traded when the option was placed. Additionally, the assignment can be held until the underlying stock recovers beyond the assigned strike price. Continue reading "Options: How About Those Losing Trades and Managing Risk Profile?" →

I’ll be discussing a comprehensive options strategy and key fundamentals for long-term successful options trading. These essentials will enable your portfolio to appreciate steadily month after month for consistent portfolio appreciation. Since options are a bet on where stocks won’t go, not where they will go, this is accomplished without predicting which way the market will move. These fundamentals provide long-term durable high-probability win rates to generate consistent income while mitigating drastic market moves. Following these option trading essentials, I’ve demonstrated an 87% options win rate over the previous 7 months through both bull and bear markets while outperforming the S&P 500 over the same period by a wide margin producing a 6.4% return against a 1.0% for the S&P 500.

Empirical Application

Applying these 7 essentials, long-term options trading success can be achieved to generate consistent income and mitigate risk in a high-probability manner. I was able to win 87% of my options trades while capturing 59% of premium income (Figure 1). This was achieved by trading options in a diversity of tickers for a total of 66 stock and ETFs. These essentials resulted in a wide outperformance relative to the S&P 500, posting a 6.4% return compared to a 1% return for the S&P 500 (Figure 2).

Figure 1 – Metrics across the options based strategy over the previous 7 months Continue reading "7 Essentials For Effective Options Trading" →

After posting my recent options article “High-Probability Options Trading Thrives” where I demonstrated an 87% options win rate throughout the bear and bull markets in Q4 2018 and Q1 of 2019, respectively, I received a lot of questions. I previously walked through how powerful options are and how you can be wrong about the direction of the stock and still make money. This is because options are a bet on where stocks won’t go, not where they will go. When coupled with IV Rank, options provide a high-probability win rate while generating income, mitigating risk and circumventing drastic market moves. Many questions that arose were centered on implied volatility rank (IVR) and how this can be leveraged appropriately when engaging in options trading. IVR is by far the most important and most essential concept to understand when it comes to long-term success in options trading. Here, I’ll discuss how implied volatility and IVR can impact options pricing and provide options traders with a statistical edge over the long term.

Purpose and Implied Volatility (IV)

The whole idea behind options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciation steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it’s this implied volatility component when used appropriately that provides options traders with a statistical edge over the long term.

Implied volatility is the market’s prediction of how volatile the stock will be in the future or the expected volatility of a stock. Implied volatility has many implications and relationships that should be grasped. Continue reading "IV Rank - Key To Successful Long-Term Options Trading" →