Tag: Options Trading Strategy

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital is the core of options trading. Options enable smooth and consistent portfolio appreciation and consistent monthly income without guessing which way the market will move. Over the past 9-plus months (May 2020 – February 2021), 203 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 7.8% and an overall option premium capture of 83% while outperforming the S&P 500. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with 50% of the portfolio held in cash, thus substantially less risk. The options-based approach circumvented the September, October, and January sell-offs while outperforming the S&P 500, posting returns of 47.6% and 43.7%, respectively (Figures 2-6). Following a well-defined set of options rules are essential for long-term successful options trading. Continuously reflecting and refining these rules is also essential to ensure continuous improvement via lessons learned with supplemental rules (Figure 1).

Options Trading Framework - 10 Essential Rules

A set of trading fundamentals must be followed to run an options-based portfolio successfully. Specifically, position-sizing, sector diversity, maximizing the number of trade occurrences, and risk-defined strategies are some notable areas that traders need to heed for long-term successful trading.

To run an options-based portfolio effectively and successfully over the long-term, the following option trading fundamentals must be exercised in every trade. Violating any of these fundamental rules will jeopardize this strategy and possibly negate the effectiveness of this approach on the whole. Below are 10 option trading rules that provide a basic framework of options trading to maintain discipline and systematic trading mechanics.

Figure 1 – 10 rules for long-term successful options trading as demonstrated throughout these performance metrics
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Another positive month for the options-based portfolio despite another negative month for the markets. A positive $3,372 in income was generated for January 2021. Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital is the core of options trading. Options enable smooth and consistent portfolio appreciation without guessing which way the market will move and allow one to generate consistent monthly income in a high probability manner in both bear and bull market scenarios. Over the past 9-plus months (May 2020 – January 2021), 203 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 7.8% and an overall option premium capture of 83% while outperforming the S&P 500. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk. The options-based approach circumvented the September, October, and January sell-offs while outperforming the S&P 500, posting returns of 47.6% and 43.7%, respectively (Figures 1, 2, and 3).

Figure 1 – Overall options-based performance compared to the S&P 500 from May 2020 – January 31st, 2021
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Wall Street capped off one of the most volatile years in history. The Dow Jones and S&P 500 ended the year at all-time highs, posting returns of 16.3% and 7.3%, respectively, for 2020. At the same time, the Nasdaq posted a return of 43.6% for the year. These unprecedented returns were achieved despite the S&P 500 nosediving over 30% earlier in the year due to the coronavirus pandemic sweeping the world. In this market environment harnessing options can allow traders to define risk, leverage a minimal amount of capital, and maximize returns.

All-time highs have been reached with the confluence of election certainty, improving vaccine prospects across the globe, and massive stimulus out of Washington. These positive developments have been priced into the markets. The broader indices are richly valued as measured by virtually any historical metric via stretched valuations, options put/call ratios, broad participation above 200-day moving averages, and elevated P/E ratios. Collectively, these may be potential warning signs of near-term pressures. Heeding these frothy market conditions via risk mitigation may be best served with risk-defined options trading.

Options: Margin of Protection and Defining Risk

Harnessing options in frothy markets allows one to define risk, leverage a minimal amount of capital, and maximize returns. Options can be structured to allow a margin of downside and/or upside stock movement while collecting income in the process. In these richly valued markets, allowing a margin of downside and/or upside stock movement may be a great strategy to heed potential market volatility. Continue reading "Leveraging Options To Navigate Frothy Markets" →