Tag: how to trade options

A total of 80 options trades were placed in May, June, July, and thus far in August as the markets rebounded after the COVID-19 lows. During this timeframe, all 80 trades were winning trades to lock in a 100% option win rate with an average income per trade of $189 and an average return on investment (ROI) per trade of 7.5%. After the tumultuous market lows of March and into early April, leveraging a minimal amount of capital, mitigating risk, and maximizing returns was essential. An options-based portfolio can offer the optimal balance between risk and reward while providing a margin of downside protection with high probability win rates. As the market continues to rebound, optimal risk management is essential when engaging in options trading as a means to drive portfolio performance.

Through the end of July, an option-based portfolio broken out into roughly three equal parts of cash, long equity and options outperformed the S&P 500 by a comfortable margin, posting returns of 28.0% and 26.6%, respectively. When engaging in options trading, risk mitigation needs to be built into each trade via risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation, and selling options to collect premium income. Maintaining disciple via continuing to risk-define trades, leveraging small amounts of capital while maximizing return on investment, is essential despite the impressive streak of 80 consecutive winning trades.

Anchoring Down An Options-Based Portfolio

Anchoring down an options-based portfolio is a key component to taking advantage of black swan events such as COVID-19 via broad-based ETF exposure. During the market lows of March/April, the cash-on-hand component of an options-based portfolio was used to go long equity via Dow Jones (DIA), S&P 500 (SPY), and Nasdaq (QQQ). The cash-on-hand was repurposed to balance out the portfolio into roughly three equal parts of one-third cash, one-third long ETF-based equity, and one-third options driven. Through the end of July, an option-based portfolio broken out into roughly three equal parts of cash, long equity and options outperformed the S&P 500 by a comfortable margin, posting returns of 28.0% and 26.6%, respectively (Figure 1).

Figure 1 – Overall options-based portfolio returns compared to the S&P 500 returns over the previous four months post COVID-19 lows of 28.0% and 26.6%, respectively

4 Months Post COVID-19 Results

After placing 80 trades throughout May, June, July, and thus far in August, a 100% options win rate, 99% premium capture, and 7.5% ROI per trade was achieved. This was accomplished via leveraging a minimal amount of Continue reading "Options Trading - S&P Outperformance Despite Epic Bull Run" →

Leveraging a minimal amount of capital, mitigating risk, and maximizing returns is the objective of an options-based portfolio. Options trading can offer the optimal balance between risk and reward while providing a margin of downside protection with a high probability of success. Proper portfolio construction and optimal risk management are essential when engaging in options trading as a means to drive portfolio performance. Key pillars of risk mitigation are rooted in maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation, and selling options to collect premium income. Customizing your option trade structure is another element that can be layered into the overall strategy for long-term success in options trading. A risk-defined custom put spread offers layers of protection, thus optimizing the risk management aspect of an options trade while maximizing return on investment.

Custom Put Spreads: Results

Leveraging a minimal amount of capital and maximizing returns with risk-defined trades optimizes the risk-reward profile. Whether you have a small account or a large account, a defined risk (i.e., custom put spreads) strategy enables you to leverage a minimal amount of capital which opens the door to trading virtually any stock on the market regardless of share price such as Apple (AAPL), Amazon (AMZN), Chipotle (CMG), Facebook (FB), etc. Risk-defined options can easily yield double-digit realized gains over the course of a typical one month contract (Figures 1, 2, and 3).

Figure 1 – Average income per trade of $201, the average return per trade of 7.6% and 98% premium capture over 63 trades in May and June
Continue reading "Options Trading - Custom Put Spreads" →

Despite the COVID-19 backdrop, some individual stocks and broader indices have exploded to new all-time highs and retraced previous all-time highs, respectively. Since the depths of the COVID-19 induced sell-off in late March, the markets have experienced an uninterrupted resurgence. It’s easy to become complacent when markets are roaring higher. However, one must remain disciplined when managing risk, especially as it relates to options trading. Mitigating risk and maximizing returns is paramount as the markets rotate out of the depths COVID-19 sell-off. Options trading offers the optimal balance between risk and reward while providing a margin of downside protection and a statistical edge. Proper portfolio construction and optimal risk management is essential when engaging in options trading as a means to drive portfolio performance. The Q4 2018 and the COVID-19 pandemic are prime examples of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation and selling options to collect premium income are keys to an effective long-term options strategy.

An Effective Long-Term Options Strategy

A slew of protective measures should be deployed if options are used as a means to drive portfolio results. One of the main pillars when building an options-based portfolio is maintaining a significant portion of cash-on-hand. This cash position provides the ability to rapidly adapt when faced with extreme market conditions such as COVID-19 and Q4 2018 sell-offs. When selling options and running an options-based portfolio, the following guidelines are essential (Figures 1 and 2):

1. Trade across a wide array of uncorrelated tickers
2. Maximize sector diversity
3. Spread option contracts over various expiration dates
4. Sell options in high implied volatility environment
5. Manage winning trades
6. Use defined-risk trades
7. Maintains a ~50% cash level
8. Maximize the number of trades, so the probabilities play out to the expected outcomes
9. Continue to trade through all market environments
10. Appropriate position sizing/trade allocation

Figure 1 – Defining the 10 rules that one must follow to appropriately manage risk and maximize returns when deploying options as a means to drive portfolio results
Continue reading "10 Options Trading Rules That Must Be Followed" →

Leveraging a minimal amount of capital, mitigating risk, and maximizing returns are paramount as the markets rotate out of the depths COVID-19 sell-off. Options trading offers the optimal balance between risk and reward while providing a margin of downside protection and a statistical edge. Proper portfolio construction and optimal risk management are essential when engaging in options trading as a means to drive portfolio performance. The Q4 2018 and the COVID-19 pandemic are prime examples of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation and selling options to collect premium income are keys to an effective long-term options strategy. A risk-defined diagonal put spread optimizes the risk management aspect of an options trade while maximizing return on investment.

Minimizing Risk and Maximizing Return

Leveraging a minimal amount of capital and maximizing returns with risk-defined trades optimizes the risk-reward profile. Whether you have a small account or a large account, a defined risk (i.e., put spreads and diagonal spreads) strategy enables you to leverage a minimal amount of capital which opens the door to trading virtually any stock on the market regardless of share price such as Apple (AAPL), Amazon (AMZN), Chipotle (CMG), Facebook (FB), etc. Risk-defined options can easily yield double-digit realized gains over the course of a typical one month contract (Figures 1, 2, and 3).

Figure 1 – Average income per trade of $190, the average return per trade of 7.3% and 95% premium capture over 41 trades in May and June
Continue reading "Options Trading - Diagonal Put Spreads Part 2" →