Tag: Options Strategy

How To Trade Options In Small Accounts

Posted on by The INO.com Team

How can you effectively run an options-based portfolio when trading with a small account? For example, how can you trade options on stocks like Tesla (TSLA), Ulta Beauty (ULTA), Apple (AAPL), Disney (DIS), Facebook (FB), etc., that possess such a high price per share when account balances are limited? People often shy away from options trading due to low account balances. However, limited capital doesn’t preclude you from trading, and in fact, you can run an effective options portfolio regardless of account size. Options enable you to leverage a minimal amount of capital, which opens the door to trading virtually any stock, all while defining your risk.

Over the past 13 months, ~315 trades have been made with a win rate of 86% and a premium capture of 57% across 69 different tickers. When stacked up against the S&P 500, an options strategy generated a return of 9.1% compared to the S&P 500 index, which returned 3.7% over the same period. These returns demonstrate the resilience of this high probability options trading in both bear and bull markets. Moreover, these results can be replicated irrespective of account size when following the fundamentals outlined below.

Myth Busting Small Account Limitations

Options can be leveraged, using small amounts of capital to trade what otherwise would require much greater capital requirements. How is this possible? It’s possible because options can be traded in a risk-defined manner. Therefore, entering any options trade, the required capital equals the maximum loss while the maximum gain equals the option premium income received. Since the risk-defined approach has a max loss, the required capital is equivalent to the max loss. The maximum loss value only needs to be covered by the available account balance. The aggregate price of the underlying shares within an option contract (contracts trade in 100 share blocks) is irrelevant.

The overall options-based portfolio strategy is to sell options that enable you to collect premium income in a high-probability manner while generating consistent income for steady portfolio appreciation regardless of market conditions. This is all done without predicting which way the market will move since options are a bet on where stocks won’t go, not where they will go. This options-based approach provides a margin of safety, mitigates drastic market moves, and contains portfolio volatility. This strategy is agnostic to account balance and applies to accounts of all sizes. Continue reading "How To Trade Options In Small Accounts" →

Options Based Portfolio Outperformance - Keys To Success

Posted on by The INO.com Team

A year-long case study running an options-based portfolio was conducted to demonstrate the effectiveness of this strategy against the traditional stock-picking approach. Options are a great way to manage and mitigate risk while circumventing market swings. Selling options allows you to collect premium income in a high-probability manner while generating consistent income for steady portfolio appreciation regardless of market conditions. Of course, this is all done without predicting which way the market will move since options are a bet on where stocks won’t go, not where they will go.

Primarily sticking with dividend-paying large-cap stocks across a diversity of tickers that are liquid in the options market is a great way to generate superior returns with less volatility over the long term. Over the past 12 months, 298 trades have been made with a win rate of 86% and premium capture of 57% across 69 different tickers. Moreover, when stacked up against the S&P 500, an options strategy generated a return of 6.9% compared to the S&P 500 index, which returned 2.2% over the same period. These returns demonstrate the resilience of this high probability options trading in both bear and bull markets.

This outperformance and high win rate was achieved by following a set of options-based fundamentals. Specifically, position-sizing, sector allocation, maximizing the number of trade occurrences, and risk-defined strategies are some notable areas that traders need to heed for long-term successful options trading.

Essential Options Trading Fundamentals

To effectively and successfully run an options-based portfolio over the long term, the following options trading fundamentals must be exercised in each and every trade. Violating any of these fundamentals will jeopardize this strategy and possibly negate the effectiveness of this approach on the whole. Continue reading "Options Based Portfolio Outperformance - Keys To Success" →

6.9% Options Portfolio Return vs. 2.2% S&P 500 Return

Posted on by The INO.com Team

Over the past 12 months, I’ve managed an options-based portfolio and demonstrated how this approach can offer a superior alternative to traditional stock picking. An options-based approach is very similar to running your portfolio like a business where you manage risk and take profits. Alternatively, an options-based approach is much like an insurance company. You sell as many policies as possible to collect as much premium income as possible with a premium cost level that maximizes a statistical edge to your benefit.

An option-based strategy mitigates risk and circumvents drastic market moves. Selling options and collecting premium income in a high-probability manner generates consistent income for steady portfolio appreciation in bear and bull market conditions. This is all done without predicting which way the market will move. Sticking with dividend-paying large-cap stocks across a diversity of tickers that are liquid in the options market is a great way to generate superior returns with less volatility over the long term.

Over the past 12 months, 298 trades have been made with a win rate of 86% and a premium capture of 57% across 69 different tickers. When stacked up against the S&P 500, the options strategy generated a return of 6.9% compared to the S&P 500 index, which returned 2.2% over the same period. Options are a bet on where stocks won’t go, not where they will go, where high probability options trading thrives in both bear and bull markets.

Options Trading
Figure 1 – Basic principles and building blocks of an options-based portfolio
Continue reading "6.9% Options Portfolio Return vs. 2.2% S&P 500 Return" →

Options: You Choose Whether You Win 70%, 80% or 90% Of Your Trades

Posted on by The INO.com Team

Previously, I wrote an article putting forth the efficient market hypothesis termed “There's No Edge In Stock Picking” and how less than 10% of fund managers outperform their benchmark over the long-term. These bleak performance metrics and the fact that there’s only a 36% chance that you pick a stock that outperforms the index is what makes options trading so effective.

Whether you want to win 70%, 80% or even 90% or your trades, you dictate your probability of success when it comes to options trading over the long-term. If you set your probability of success at ~85% and make trades at that probability level through all market conditions over the long-term on the scale of hundreds of trades, you’ll end up winning ~85% of your option trades. Options trading allows one to profit without predicting which way the stock will move. Options aren’t about whether or not the stock will move up or down; it’s about the probability of the stock not moving up or down more than a specified amount. Put simply; options are a bet on where stocks won’t go, not where they will go.

Options trading can generate consistent income and mitigate portfolio risk while producing high probability win rates. Options allow your portfolio to generate smooth and consistent income month after month without predicting which way the stock market will move. 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 are a long-term game that requires discipline, patience, time, maximizing the number of trade occurrences and continuing to trade through all market conditions. An options-based approach provides a margin of safety with a decreased risk profile while providing high-probability win rates that are determined by the trader himself.

Empirically, over the previous 12 months, I’ve produced a return of 8.6% relative the S&P return of 3.2% while winning 85% of my trades via leveraging ~70 different ticker symbols. Continue reading "Options: You Choose Whether You Win 70%, 80% or 90% Of Your Trades" →

Your Option Contract Was Assigned - Now What?

Posted on by The INO.com Team

Options trading can serve as a powerful means to generate consistent income and mitigate portfolio risk while producing high probability win rates. Options trading allows one to profit without predicting which way the stock will move. Options aren’t about whether or not the stock will move up or down; it’s about the probability of the stock not moving up or down more than a specified amount. Options allow your portfolio to generate smooth and consistent income month after month without predicting which way the stock market will move. Options are a bet on where stocks won’t go, not where they will go. 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 are 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. Despite this favorable trading backdrop, occasionally options can be assigned and move against you despite managing the risk profile. How do you manage these unrealized losses and navigate these assignments to mitigate downside risk and ultimately sell your assignment at a net gain? This is the scary side of options that is rarely talked about, here I’ll demonstrate the actions I take to manage these assignments.

Assignment

Even though options trading provides a statistical advantage and generates high probability win rates, being assigned shares inevitably occurs. Briefly, when selling a put option, you agree to buy shares at an agreed-upon price (strike price) by an agreed-upon date (expiration) in exchange for premium income.

You collect premium income to compensate you for agreeing to buy shares at the agreed price by the agreed-upon date. As the contract lifecycle unfolds and the stock does not break below the strike price, profits can be realized early by buying-to-close or letting the contract expire to capture the entire premium. When the stock breaks down and trades below the agreed-upon price at expiration of the contract, the stock will be assigned. Continue reading "Your Option Contract Was Assigned - Now What?" →