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"

Selling Put Options For Consistent Premium Income

Options can be a great strategy under any market condition as a standalone method or in conjunction with a long-term portfolio to augment long-term positions. Options trading can 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 sell-off throughout October and into November. 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. Put option selling can also serve as a means to initiate a position via being assigned shares strategically. Heeding critical variables such as historic and implied volatility, implied volatility as it relates to historic volatility along with probability and liquidity, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I’ll discuss these critical elements and how they translate into high probability options trading to maximize option outcomes regardless of directionality, effectively maintaining a market neutral position. 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.

Put Options Overview

Covered puts can be implemented as a means to leverage cash on hand to sell options contracts and collect premium income in the process. Contractually, this type of option selling gives the option buyer the right to sell you (the seller) shares at an agreed upon price by an agreed upon date in exchange for a premium (cash payment). An account cash reserve can be utilized for selling covered puts thus not purchasing the underlying security with the end goal of never being assigned shares and netting premium income in the process. It’s important to bear in mind that covered puts shouldn’t be sold unless one wouldn’t mind being assigned shares in the underlying equity if the underlying moves opposite the option directionality and breaks through the option strike price. Additionally, restricting covered put contacts to high quality, large-cap, dividend-paying companies with high implied volatility, high implied volatility percentile and high probability of success (i.e., one standard deviation out of the money) will mitigate risk and decrease the likelihood of assignment to maintain liquidity and add to cash on hand. The end goal is to capture premium income and maintain liquidity which is accomplished before the expiration of the contract via buy-to-close to accelerate the closure of the contract and capture realized gains. Continue reading "Selling Put Options For Consistent Premium Income"

Sneak Peak: Buy and Hold vs. Options

Every month, I release a new video for my MarketClub Options members...

I cover everything from current market conditions and trading lessons learned (good and bad), to stocks on my watch list, questions I receive from members, and more.

These videos are not an advertised part of the MarketClub Options service (which includes the MarketClub Options Blueprint, Option Basics Bootcamp, How NOT To Trade, Options 101 eBook and more), but simply an added value and something I like sharing with members.

I was asked by the MarketClub staff if we could share September's training video with non-members. I hesitated at first - then I thought, why not?! This information applies to all types of traders - buy and hold, fully invested, successful or not.

The short video below highlights: Continue reading "Sneak Peak: Buy and Hold vs. Options"