{"id":52985,"date":"2020-10-07T08:00:16","date_gmt":"2020-10-07T12:00:16","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=52985"},"modified":"2021-08-03T14:42:42","modified_gmt":"2021-08-03T18:42:42","slug":"options-based-resiliency-september-outperformance","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2020\/10\/options-based-resiliency-september-outperformance\/","title":{"rendered":"Options Based Resiliency - September Outperformance"},"content":{"rendered":"

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\u2019t been since the Financial Crisis. <\/p>\n

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\u2019s 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. <\/p>\n

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). <\/p>\n

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Figure 1 \u2013 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<\/em><\/small>
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Positive Return Despite September Sell-Off<\/h2>\n

Since March, the September sell-off was the worst technology rout, while the Dow and S&P 500 posted four-week losing streaks, their longest losing stretches since August 2019. The Nasdaq had its first weekly gain in four weeks at the tail end of September. All the major indices sold off double-digits and into correction territory throughout September. This recent September correction provides a great opportunity to demonstrate the durability and resiliency of an options-based portfolio.<\/p>\n

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Despite the indices being in correction territory for September, following the 10 rules in options trading via leveraging small amounts of capital, defining risk, and maximizing returns have generated a positive return related to the portfolio's options portion. The positive options returns were in sharp contrast to the negative returns for the overall market. Generating consistent income without guessing which way the market will move with the probability of success in your favor has proven successful despite the September correction. <\/p>\n

Results<\/h2>\n

Compared to the broader S&P 500 index, the blended options, long equity, and cash portfolio have outperformed this index. In even the most bullish scenario post-COVID-19 lows where the markets erased all the declines inflicted by the pandemic, this approach has outperformed the S&P 500 by a narrow margin through 30SEP20 (Figure 1). <\/p>\n

In May, June, July, August, and September, 121 trades were placed and closed. An 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 (Figures 2, 3, 4, 5, and 6).<\/p>\n

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Figure 2 \u2013 Overall option metrics from May 2020 \u2013 September 2020<\/em><\/small><\/p>\n

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Figure 3 \u2013 Overall option metrics from May 2020 \u2013 September 2020<\/em><\/small><\/p>\n

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Figure 4 \u2013 ROI per trade over the past 121 trades <\/em><\/small><\/p>\n

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Figure 5 \u2013 Percent premium capture per trade over the last 121 trades<\/em><\/small> <\/p>\n

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Figure 6 \u2013 Average ROI per winning trade during each respective month<\/em><\/small> <\/p>\n

An Agile Options Strategy<\/h2>\n

Risk management is paramount when engaging in options trading. A slew of protective measures should be deployed if options are used to drive portfolio results. When selling options and running an options-based portfolio, the following guidelines are essential: <\/p>\n