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%).