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

Options
Figure 2 – Overall option metrics from May 2020 – April 2, 2021

Options
Figure 3 – Overall option metrics from May 2020 – April 2, 2021

Results

Compared to the broader S&P 500 index, the blended options, long equity, and cash portfolio have outperformed this index by a small margin. In even the most bullish scenario post-pandemic lows where the markets erased all the declines via V-shaped recovery, this approach has outpaced the S&P 500 returns through March 31, 2021, with substantially less risk (Figures 4 and 5).

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Overall, from May 2020 through March 31, 2021, 249 trades were placed and closed. A win rate of 98% was achieved with an average ROI per trade of 8.0% and an overall option premium capture of 85% while outperforming the broader market through the September 2020, October 2020, and January 2021 declines (Figure 1).

Number of Trades
Figure 4 – ROI per trade over the past ~250 trades

Premium Capture
Figure 5 – Percent premium capture per trade over the last ~250

Consistent Income Despite September 2020, October 2020, and January 2021 Declines

September 2020, October 2020, and January 2021 declines provide a great opportunity to demonstrate an options-based portfolio's durability and resiliency. 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 2020, October 2020, and January 2021, respectively (Figure 6).

Consistent Monthly Options Income

Figure 6 – Generating consistent income despite negative returns for the S&P 500 index in September 2020, October 2020, and January 2021

The positive options returns were in sharp contrast to the overall market's negative returns 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.

10 Rules for an Agile Options Strategy

Throughout 12 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:

    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

Conclusion

Annualizing the pandemic lows with an options-based strategy has been key during the September 2020, October 2020, and January 2021 declines and reinforces why appropriate risk management is essential. This approach provides a margin of safety while circumventing the impacts of drastic market moves and 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 post-pandemic bull market.

Following the 10 rules generated positive returns in all market conditions for the options segment of the portfolio over the past 12 months. The positive options 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. Despite holding 50% of the portfolio in cash, superior returns have been achieved relative to the S&P 500.

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.