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).
Figure 1 – Comprehensive options-based performance metrics
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