Tag: how to trade options

The confluence of the impending U.S. Presidential election, rising COVID-19 cases domestically and abroad, and market dependency on stimulus measures give rise to a potentially volatile environment in November. Positioning your portfolio to be as agile as possible is essential when navigating these potentially volatile events. Cash on-hand, exposure to broad-based ETFs, and options is an ideal mix to achieve the portfolio agility required to mitigate uncertainty and volatility expansion.

Options trading at its core defines risk, leveraging a minimal amount of capital, and maximizing investment return. Proper portfolio construction is essential when engaging in options trading to drive portfolio results. This cash liquidity position provides portfolio agility to adjust when faced with extreme market conditions such as the September market correction rapidly.

An agile options based portfolio is essential to navigating these pockets of volatility. The recent September correction is a prime example of why maintaining liquidity is one of the many keys to an effective long term options strategy. In May, June, July, August, September, and October, 141 trades were placed and closed. An options win rate of 97% was achieved with an average ROI per trade of 7.5% and an overall option premium capture of 88% while outperforming the broader market despite the September correction (Figures 1 and 2).

Continue reading "Mitigating Election And COVID-19 Volatility" →

Options trading, at its core, is defining risk, leveraging a minimal amount of capital, and maximizing return on investment. Options trading in combination with long equity via broad-based index ETFs and cash-on-hand provides portfolio agility in the face of market corrections and in times of volatility expansion. COVID-19 was the linchpin for the major indices to drop over ~30% in March. Logging the worst sell-off since the Great Depression and inducing extreme market volatility that hasn’t been since the Financial Crisis.

Although options trading provides a margin of downside protection and a statistical edge, no portfolio is immune from the wreckage when hit with a black swan event. Thus proper portfolio construction is essential when engaging in options trading to drive portfolio results. One of the main pillars of building an options-based portfolio is maintaining ample liquidity by holding ~50% of one’s portfolio in cash. This liquidity position provides portfolio agility to adjust when faced with extreme market conditions such as COVID-19 and the September market correction rapidly.

An agile options based portfolio is essential to navigating these pockets of volatility. The COVID-19 induced sell-off and recent September correction are prime examples of why maintaining liquidity is one of the many keys to an effective long term options strategy. In May, June, July, August, and September, 121 trades were placed and closed. Options win rate of 98% was achieved with an average ROI per trade of 7.3% and an overall option premium capture of 90% while outperforming the broader market over the September downturn (Figure 1).

Figure 1 – Smooth and consistent portfolio appreciation while matching the broader market gains and outperforming during the market sell-off in September. An overlay of an options/cash/long equity hybrid portfolio and the S&P 500 post-COVID-19. Even under the most bullish conditions, the hybrid portfolio outperformed the index with ~50% in cash
Continue reading "Options Based Resiliency - September Outperformance" →

A total of 99 option trades were executed in May, June, July, and August as the markets reached an inflection point and rebounded after the COVID-19 lows. During this timeframe, all 99 trades were winning trades to lock-in a 100% option win rate with an average income per trade of $180 and an average return on investment (ROI) per trade of 7.4%. After the tumultuous market lows of March and into early April, leveraging a minimal amount of capital, mitigating risk, and maximizing returns are essential. An option-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 August, an option-based portfolio broken out into roughly three parts of ~40% cash, ~30% long equity, and 30% options matched the S&P 500 performance, posting returns of 35.1% and 35.4%, respectively. 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 the 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.

Option-Based Portfolio/Long Equity Boost

Anchoring down an option-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 option-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 August, an option-based portfolio matched the performance of the S&P 500, posting returns of 35.1% and 35.4%, respectively (Figure 1). Continue reading "Options - 35% Option-Based Portfolio Return" →

How is it possible to capture more premium than what you sold an option contract for? The answer lies in the manner in how you construct your option trade (i.e., put spread vs. custom put spread). A custom put spread leverages a minimal amount of capital, defines risk, and maximizes the return on investment while enabling traders to capture greater than 100% of the option premium. Custom put spreads are ideal when engaging in options trading for many reasons. This type of trade is great to layer into a long-term successful overall options strategy which includes risk-defining trades, staggering expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades, appropriate position allocation, and always being an option seller to bring premium income into the portfolio continuously.

Using a combination of custom put spreads and put spreads, a total of 91 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 91 trades were winning trades to lock-in a 100% option win rate with an average income per trade of $185, an average return on investment (ROI) per trade of 7.5%, and overall premium capture of 99.4%. 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 (Figures 1, 2, and 3).

Figure 1 – Average income per trade of $185, the average return per trade of 7.5% and 99.4% premium capture over 91 trades in May and June
Continue reading "Options - How To Capture Over 100% Premium" →