Implied Volatility Rank - Key To Successful Long-Term Options Trading

After posting my recent options article “High-Probability Options Trading Thrives” where I demonstrated an 87% options win rate throughout the bear and bull markets in Q4 2018 and Q1 of 2019, respectively, I received a lot of questions. I previously walked through how powerful options are and how you can be wrong about the direction of the stock and still make money. This is because options are a bet on where stocks won’t go, not where they will go. When coupled with implied volatility rank, options provide a high-probability win rate while generating income, mitigating risk and circumventing drastic market moves. Many questions that arose were centered on implied volatility rank (IVR) and how this can be leveraged appropriately when engaging in options trading. IVR is by far the most important and most essential concept to understand when it comes to long-term success in options trading. Here, I’ll discuss how implied volatility and IVR can impact options pricing and provide options traders with a statistical edge over the long-term.

Purpose and Implied Volatility (IV)

The whole idea behind options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciation steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it’s this implied volatility component when used appropriately that provides options traders with a statistical edge over the long-term.

Implied volatility is the market’s prediction of how volatile the stock will be in the future or the expected volatility of a stock. Implied volatility has many implications and relationships that should be grasped. Continue reading "Implied Volatility Rank - Key To Successful Long-Term Options Trading"

High-Probability Options Trading Thrives

131 wins out of 151 trades later, through the Q4 2018 bear market and the Q1 2019 bull market, high-probability options trading thrives regardless of the market backdrop. Options trading is powerful because you can be wrong about the direction of a stock and still make money. Hence how I was able to achieve an 87% success rate as the market witnessed dramatic moves over the past 6 months. In Q4 2018, the S&P 500 sold off 14% and erased all of its gains for the year. The start to 2019 posted its best January in over 30 years and rounding out the quarter with a return of ~12.7%. In this article, I’ll be discussing how options trading can generate consistent income with a high-probability of success, regardless of market conditions. This is accomplished since options are a bet on where stocks won’t go, not where they will go. Following the options trading framework described in this article, my options-based portfolio resulted in a total portfolio return of 4.2% against the S&P 500 return of -3.1% over the previous 6 months. This timeframe provided both bear and bull market conditions to demonstrate the effectiveness and resiliency of options trading while outperforming the broader index by a wide margin. This seesaw from a negative to a positive market backdrop provided unique opportunities to capitalize on options trading. In Q4 2018, during the bear market, I was able to achieve a 79% options success rate by closing 66 out of 84 option contracts for wins. In Q1, during the bull market, I was able to achieve a 97% options success rate by closing 65 out of 67 option contracts for wins. Taken together, options provide a margin of safety, enabling your portfolio to mitigate risk, provide consistent income and hedge against market volatility. Options have a unique attribute since you can still be successful while generating income even if you’re wrong about the direction of the stock. Continue reading "High-Probability Options Trading Thrives"

Bear or Bull Market - Options Trading Provides Outperformance and 98% Win Rate

The broader market has whipsawed over the past five months. The S&P 500 posted one of its worst quarters and since the Great Depression with the index selling off 14% and erasing all of its gains from 2018. 2019 started on a high note for the S&P 500 with January posting a 7.9% gain, logging its best January in over 30 years. This was followed by continued strength in February, putting the index on its best footing since 1991 with a cumulative return of 11% year-to-date. In this article, I’ll be discussing how options trading can generate consistent premium income with a high-probability of success, regardless of the market backdrop. This is accomplished since options are a bet on where stocks won’t go, not where they will go. Following the options trading mechanics described in this article, my options-centric portfolio resulted in a total portfolio return of 4.2% against the S&P 500 return of -4.4% over the previous five months. This timeframe provided both bear and bull market conditions to demonstrate the effectiveness and resiliency of options trading while outperforming the broader index by a wide margin. This seesaw from a negative to a positive market backdrop provided unique opportunities to capitalize on options trading via capturing a higher percentage of premium income. In January and February, I was able to achieve a 98% options success rate by closing 46 out of 47 option contracts while leveraging cash-on-hand.

Options Crash Course

Options trading can be a fantastic avenue to mitigate risk, provide consistent income and hedge against market movements while maintaining cash-on-hand. Risk mitigation is particularly important given the market wide melt-down during Q4 of 2018 albeit the market has rebounded furiously thus far in 2019 through February. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Heeding critical variables such as implied volatility, implied volatility percentile and probability, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I demonstrated via empirical data how these critical elements translate from predictive high probability outcomes to reality. In the end, options are a bet on where the stock won’t go, not where it will go and collecting premium income throughout the process. These empirical data demonstrate that the probabilities play out given enough occurrences over time. Despite a small sample size (148 trades) in a period where the market seesawed from erasing all of its gains for 2018 to posting its best January/February since 1991, an 85% win rate was achieved while outperforming the broader market by a spread of 8 percentage points from October of 2018 through February of 2019 (S&P -4.4% vs. 4.2%).

Trading Mechanics

Continue reading "Bear or Bull Market - Options Trading Provides Outperformance and 98% Win Rate"

January Market Rebound Provides 100% Options Win Rate

Previously, I authored a piece covering options trading and the mechanics behind long-term successful options trading to generate high probability win rates for consistent premium income. I provided empirical data via 100 options trades during the market wide sell-off in Q4 of 2018 where the Dow and S&P 500 erased all of its gains while turning negative for the year and posting their worse December since the Great Depression in 1931. Despite this negative backdrop, I was able to successfully close 80% of my trades at a profit, demonstrating the resiliency of high probability options trading regardless of market condition. These trading mechanics resulted in a total portfolio return of -5.9% against the S&P 500 return of -14.0% in Q4 of 2018, outperforming the broader index by a wide margin.

Since then, the month of January presented the polar opposite market scenario with the S&P closing out the best January in over 30 years. Maintaining the same trading mechanics deployed in Q4 of 2018 into January produced a portfolio return of 9.26% against the S&P 500 return of 7.87%, outperforming the index by a healthy margin. This seesaw from a negative to a positive market backdrop provided unique opportunities to capitalize on option trading via capturing a higher percentage of premium income, closing contracts early in the option lifecycle and relinquishing previously assigned contracts, which allowed the repurposing of capital for further options trading. In January, I was able to achieve a 100% options win rate by closing 30 out of 30 option contracts while maintaining capital liquidity.

Terse Overview

Options trading can be a fantastic avenue to mitigate risk; provide consistent income, lower cost basis of underlying stock positions and hedge against market movements while maintaining liquidity. Risk mitigation is particularly important given the market wide melt-down during Q4 of 2018. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Heeding critical variables such as implied volatility, implied volatility percentile and probability, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. Continue reading "January Market Rebound Provides 100% Options Win Rate"

My First 100 Options Trades

I previously wrote an article walking through the anatomy of an options trade and the mechanics behind long-term successful options trading to generate high probability win rates for consistent premium income. In this article, I will provide empirical data over my first 100 options trades as a supplemental follow-up to this article above. These data are particularly noteworthy for a variety of reasons, most notably due to the market wide sell-off during this period where the Dow and S&P 500 erased all of its gains while turning negative for 2018. Furthermore, a week in December marked the worst percentage drop since the 2008 financial crisis while the Dow and S&P 500 posted their worse December since the Great Depression in 1931. This negative market backdrop provided a true test to the high probability trading and durability of this options trading method. Albeit my portfolio over this timeframe still produced a negative return these returns outperformed the S&P 500 by a wide margin (-8.8% versus -17.2%)

Options trading can mitigate risk; provide consistent income, the lower cost basis of underlying stock positions and hedge against market movements while maintaining liquidity. Risk mitigation is particularly important given the market wide sell-off throughout October-December of 2018. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Heeding critical variables such as implied volatility, implied volatility percentile and probability, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I’ll demonstrate via empirical data how these critical elements translate from theory to reality. In the end, options are a bet on where the stock won’t go, not where it will go and collecting premium income throughout the process. These empirical data demonstrate that the probabilities play out given enough occurrences over time. Despite a small sample size (100 trades) in a period where the market erased all of its gains for the year and posted the worst quarter since 1931, an 80% win rate was achieved while outperforming the broader market by a wide margin. Continue reading "My First 100 Options Trades"