Beta-Controlled Options Portfolio

Controlling portfolio beta (a measure of volatility or systemic/market risk of a portfolio compared to the market on the whole) while generating the same or superior returns can be achieved with options. A beta-controlled portfolio can be achieved via a blended approach where 50% cash is held in conjunction with long index-based equities and an options component.

Over the past ~13 months, post COVID-19 induced lows, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based/beta-controlled portfolio strategy. They 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 various market scenarios. Over the past 13 months (April 2020 – April 2021), 249 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall option premium capture of 85% 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 via a beta-controlled manner. The options-based approach circumvented the September 2020, October 2020, and January 2021 sell-offs while outperforming/matching the S&P 500 over the 13-month post-pandemic bull run, posting returns of 58.2% and 61.8%, respectively (Figures 1, 2, and 3).

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Figure 1 – Overall options-based performance compared to the S&P 500 from April 2020 – April 2021
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Rolling Trades: Removing The Negative Connotation

Rolling option trades has a negative perception in the options world. The act of rolling an options trade does not deserve the negative connotation it has garnered over the years. Rolling can serve as a valuable tool in a comprehensive options strategy. Inevitably, when trading options, an option’s strike will be challenged, and when this occurs, one may need to act to circumvent a potential loss. These potential losing trades can be managed effectively to avoid losses altogether via rolling. Given the right set of circumstances, trades can be rolled by closing out the pending trade for a debit and subsequently opening a new trade with a later date and further out-of-the-money strikes for an overall credit.

Options provide a statistical edge to the option seller’s advantage. When the option strike is challenged, this statistical edge is negated and must be reset by rolling a trade to reestablish this edge and subsequent advantage. Rolling out to a later date and further out-of-the-money strikes allows more time for the trade to work through the unexpected price excursion. Options trading enables traders to define risk, leverage a minimal amount of capital, and maximize return on investment. Options trading can create smooth and consistent portfolio appreciation without predicting which way the market will move. Options enable one to generate consistent and durable monthly income in a high probability manner in both bear and bull market scenarios, and rolling is part and parcel to this overall options-based approach. Rolling trades seldomly occurs, and over the past 12 months, only 7 trades were rolled while only 3 of those 7 were required (e.g., the strike remained breached at expiration).

Rolling Trades
Figure 1 – Overall rolled option metrics from May 2020 – April 9th, 2021, including rolled trades
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Options: Annualizing Pandemic Lows

Annualizing the pandemic with an agile options-based approach has demonstrated superior returns while mitigating risk. Over the past 12 months, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based strategy. Options 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 all market scenarios. Over the past 12 months (April 2020 – March 2021), 249 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall premium capture of 85% while outperforming the S&P 500. An options-based portfolio's performance demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk. The options-based approach circumvented September 2020, October 2020, and January 2021 sell-offs while outperforming the S&P 500 over the post-pandemic bull run, posting returns of 55.0% and 53.7%, respectively (Figures 1, 2, and 3).

Options
Figure 1 – Overall options-based performance compared to the S&P 500 from April 2020 – March 2021
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Capturing Over 100% Premium - Diagonal Spreads

Capturing over 100% of the option's premium income and closing trades prior to expiration is the ideal scenario for options trades. The manner in how one constructs this options trade is the key to these attributes. A diagonal spread leverages a minimal amount of capital, defines risk, and maximizes return on investment while enabling traders to capture greater than 100% of the option premium while accelerating the trade's closure before expiration. Diagonal spreads are ideal when engaging in options trading for many reasons, namely its risk mitigation properties. This type of trade is excellent 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 continuously bring premium income into the portfolio.

Using a combination of diagonal call spreads, diagonal put spreads, call spreads, put spreads, and iron condors over the past 11 months, a total of 248 options trades were placed and closed. During this timeframe, 243 trades were winning trades for a 98% option win rate with an average income per trade of $168, an average return on investment (ROI) per trade of 7.9%, and overall premium capture of 85%. An options-based portfolio can offer the optimal balance between risk and reward while providing a margin of downside and upside protection with high probability win rates. Risk management is essential when engaging in options trading to drive portfolio performance, and diagonal spreads are a key component to this overall strategy (Figures 1, 2, and 3).

Diagonal Spreads

Figure 1 – Comprehensive options-based performance metrics
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How To Achieve A 98% Options Win Rate

Achieving an options win rate of 98% requires following a core set of 10 basic rules supplemented by some general guidance. Following these rules while deploying an array of option types (i.e., put spreads, call spreads, iron condors, and diagonal call/put spreads) across a diverse large-cap ticker list is the foundation of this success. Staggering expiration dates, managing winning trades, keeping trade allocation in balance with overall portfolio size, and trading in tickers that are liquid in the options market are other critical components to this success. Sticking to high probability outcomes via leveraging delta as a proxy, layering in some basic technical analysis, and maintaining appropriate portfolio structure is essential while ideally maintaining a 50% cash in addition to a hybrid long equity/options approach.

Options Trading Framework - 10 Essential Rules

A set of trading fundamentals must be followed to run an options-based portfolio over the long-term 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 options trading.

The following option trading fundamentals must be exercised in every trade. Violating any of these fundamental rules will jeopardize this strategy and possibly negate this approach's effectiveness 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). Continue reading "How To Achieve A 98% Options Win Rate"