{"id":56825,"date":"2022-04-26T08:00:32","date_gmt":"2022-04-26T12:00:32","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=56825"},"modified":"2022-04-25T15:56:29","modified_gmt":"2022-04-25T19:56:29","slug":"navigating-volatility-risk-controlled-portfolio","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2022\/04\/navigating-volatility-risk-controlled-portfolio\/","title":{"rendered":"Navigating Volatility - Risk-Controlled Portfolio"},"content":{"rendered":"

Controlling portfolio beta, which measures overall systemic risk of a portfolio compared to the market, on the whole, is essential as these markets continue to display bouts of extreme volatility. Containing volatility while generating superior returns relative to the market is the goal with an options-based portfolio. Mitigating risk within a portfolio can be achieved via a blended options-based approach where cash is held in conjunction with stock positions and an options component. Options alone cannot be the sole driver of portfolio appreciation; however, options can play a critical component in the overall portfolio construction to control risk and volatility. <\/p>\n

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is the core of the options-based portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. Over the past 24 months (April 2020 \u2013 March 2022), 419 trades were placed and closed. An options win rate of 97% was achieved with an average ROI per trade of 4.4% and an overall option premium capture of 50% while outperforming the Dow Jones throughout these two years. 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 attempts to circumvent market drawdowns and generated a return of 62.2% relative to the Dow Jones\u2019 58.2% (Figures 1, 2, and 3). <\/p>\n

\"Controlling
\nFigure 1 \u2013 Overall option metrics from May 2020 to March 2022 available via a Trade notification service<\/strong><\/a><\/em><\/small>
\n
\n\"Controlling
\nFigure 2 \u2013 Overall options-based performance compared to the Dow Jones from April 2020 to March 2022<\/em><\/small><\/p>\n

\"Controlling
\nFigure 3 \u2013 Overall option metrics from May 2020 to March 2022<\/em><\/small><\/p>\n

Results<\/h2>\n

Compared to the broader Dow Jones index, the blended options, long equity, and cash portfolio have outperformed this index overall and outperformed during negative return months. In even the most bullish scenario, post-pandemic lows where the markets erased all the declines and blew past previous highs via V-shaped recovery, this approach has outperformed the Dow Jones returns through March 2022 with substantially less risk (Figure 2). <\/p>\n

Overall, from May 2020 through March 2022, 419 trades were placed and closed. As a result, an options win rate of 97% was achieved with an average ROI per trade of 4.4% and an overall option premium capture of 50% while outperforming the broader market (Figures 4 and 5).<\/p>\n

\"Return
\nFigure 4 \u2013 ROI per trade over the past 419 trades<\/em><\/small><\/p>\n

\"Options
\nFigure 5 \u2013 Percent premium capture per trade over the last 419 trades<\/em><\/small><\/p>\n

Consistent Income Despite Market Declines<\/h2>\n

September 2020, October 2020, January 2021, September 2021, and February 2022 declines provide a great opportunity to demonstrate the durability and resiliency of an options-based portfolio. Positive returns for the options portion of the portfolio were achieved in all of these negative months. <\/p>\n

The positive options returns were in sharp contrast to the negative returns for the overall market during these negative months. Generating consistent income without guessing which way the market will move with the probability of success in your favor is the key to options trading. However, the January 2022 market declines did result in option losses. <\/p>\n

10 Rules for an Agile Options Strategy<\/h2>\n

Throughout the past 24 months of the post-pandemic rebound, a disciplined approach to an agile options-based portfolio has been essential to navigate pockets of volatility and circumvent market declines. A slew of protective measures should be deployed if options are used to drive portfolio results. When selling options and managing an options-based portfolio, the following guidelines are essential: <\/p>\n