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 and consistent monthly income without guessing which way the market will move. Over the past 9-plus months (May 2020 – February 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 50% of the portfolio held in cash, thus 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 2-6). Following a well-defined set of options rules are essential for long-term successful options trading. Continuously reflecting and refining these rules is also essential to ensure continuous improvement via lessons learned with supplemental rules (Figure 1).
Options Trading Framework - 10 Essential Rules
A set of trading fundamentals must be followed to run an options-based portfolio successfully. Specifically, position-sizing, sector diversity, maximizing the number of trade occurrences, and risk-defined strategies are some notable areas that traders need to heed for long-term successful trading.
To run an options-based portfolio effectively and successfully over the long-term, the following option trading fundamentals must be exercised in every trade. Violating any of these fundamental rules will jeopardize this strategy and possibly negate the effectiveness of this approach on the whole. Below are 10 option trading rules that provide a basic framework of options trading to maintain discipline and systematic trading mechanics.
Figure 1 – 10 rules for long-term successful options trading as demonstrated throughout these performance metrics - Trade Notification Service
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