Another positive month for the options-based portfolio despite another negative month for the markets. A positive $3,372 in income was generated for January 2021. Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital is the core of options trading. Options 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 both bear and bull market scenarios. Over the past 9-plus months (May 2020 – January 2021), 203 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 7.8% and an overall option premium capture of 83% 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. The options-based approach circumvented the September, October, and January sell-offs while outperforming the S&P 500, posting returns of 47.6% and 43.7%, respectively (Figures 1, 2, and 3).
Figure 1 – Overall options-based performance compared to the S&P 500 from May 2020 – January 31st, 2021
Figure 2 – Overall option metrics from May 2020 – December 31st, 2021
Figure 3 – Overall option metrics from May 2020 – January 31st, 2021
When compared to the broader S&P 500 index, the blended options, long equity, and cash portfolio has outperformed this index by a significant margin. In even the most bullish scenario post-COVID-19 lows where the markets erased all the declines inflicted by the pandemic via V-shaped recovery, this approach has outpaced the S&P 500 returns through 31JAN21 with substantially less risk (Figures 4 and 5).
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Overall, from May 2020 through January 2021, 203 trades were placed and closed. A win rate of 98% was achieved with an average ROI per trade of 7.8% and an overall option premium capture of 83% while outperforming the broader market through the September, October, and January declines (Figure 1).
Figure 4 – ROI per trade over the past ~220 trades
Figure 5 – Percent premium capture per trade over the last ~220 trades
Consistent Income Despite September, October, and January Declines
The September, October, and January declines provide a great opportunity to demonstrate the durability and resiliency of an options-based portfolio. A positive $1,251 return, a positive $2,585 return, and a positive $3,372 return for the options portion of the portfolio was achieved in September, October, and January, respectively (Figure 6).
Figure 6 – Generating consistent income despite negative returns for the S&P 500 index in September, October, and January
The positive returns were in sharp contrast to the negative returns for the overall market in September, October, and January. 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.
10 Rules for an Agile Options Strategy
An agile options-based portfolio is 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 (Figure 7):
1. Trade across a wide array of uncorrelated tickers
2. Maximize sector diversity
3. Spread option contracts over various expiration dates
4. Sell options in high implied volatility environments
5. Manage winning trades
6. Use defined-risk trades
7. Maintains a ~50% cash level
8. Maximize the number of trades, so the probabilities play out to the expected outcomes
9. Place probability of success in your favor (delta)
10. Appropriate position sizing/trade allocation
Figure 7 – 10 rules for long-term successful options trading as demonstrated throughout these performance metrics
The September, October, and January declines reinforce why appropriate risk management is essential. An options-based approach provides a margin of safety while circumventing the impacts of drastic market moves as well as containing portfolio volatility. In the face of volatility, consistent monthly income has been generated while outpacing the S&P 500 with 50% of the portfolio in cash. An options/cash/long equity hybrid portfolio demonstrates its durability even when compared to the most bullish conditions.
Following the 10 rules has generated positive returns in all market conditions for the options segment of the portfolio over the past 9 months. The positive returns were in sharp contrast to the negative returns for the overall market. This negative backdrop demonstrates the durability and resiliency of an options-based portfolio to outperform during pockets of market turbulence. To this end, cash-on-hand exposure to long positions via broad-based ETFs and options is an ideal mix to achieve the portfolio agility required to mitigate uncertainty and volatility expansion.
Thanks for reading,
The INO.com Team
Disclosure: The author holds shares in AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY and USO. The author has no business relationship with any companies mentioned in this article. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned.