ETF That Opens The Door To Play Options

For most investors, the world of “options” is another universe. Most investors don’t understand how they work, how time decay affects them, or why they can dramatically change the price when their underlying asset ‘hardly’ moved. So it's very understandable why a lot of investors simply stray away from options and stick to the ‘simpler’ investments they understand.

However, every investor should at least attempt to understand how options work and why they are important to the market. Further, most (especially long-term buy-and-hold investors) investors should, at the very least, occasionally dabble in options from time to time.

I know what you are thinking, “this guy is nuts, options trading is gambling, not investing, I have been there, done that, and I’m not doing it again.” But hear me out before your stop reading.

First off, I am a long-term buy-and-hold investor at heart, and that is what I recommend to everyone. Historically, long-term buy-and-hold investing is better than trading, short-term market timing etc., etc. However, with options, you can be long-term investors and make a little cash on the side while essentially having zero risk, at least zero risk of losing capital. Continue reading "ETF That Opens The Door To Play Options"

Navigating Volatility - Beta-Controlled Options

Controlling portfolio beta, which measures the overall systemic risk of a portfolio compared to the market, on the whole, is essential as these markets continue to break record high after record high with violent pullbacks. The month of June was a prime example as the markets pushed to new all-time highs early in the month, then suffered a Federal Reserve induced sold-off to only bounce back into positive territory to close out the month. Controlling beta while generating the same or superior market returns is the goal with an options-based portfolio. A beta-controlled portfolio can be achieved via a blended options-based approach where 50% cash is held in conjunction with long index-based equities and an options component. Options alone cannot be the sole driver of portfolio appreciation; however, they can play a critical component in the overall portfolio construction to control beta.

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital is the core of this options-based/beta-controlled portfolio strategy. They can enable smooth and consistent portfolio appreciation without guessing which way the market will move, and allow one to generate consistent monthly income in a high probability manner in various market scenarios. Over the past 15 months (April 2020 – May 2021), 293 trades were placed and closed. An options win rate of 98% was achieved with an average ROI per winning trade of 7.0% and an overall option premium capture of 84% while moving in lockstep with the S&P 500. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk via a beta-controlled manner. The options-based approach circumvented September 2020, October 2020, January 2021, and May 2021 sell-offs (Figures 1, 2, and 3).

Options
Figure 1 – Overall options-based performance compared to the S&P 500 from April 2020 – May 2021
Continue reading "Navigating Volatility - Beta-Controlled Options"

Options: 275 Trades and 5 Losses - 98% Win Rate

Deploying skill and caution when engaging in options trading can generate consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on investment. Options can augment portfolio appreciation across an array of different market scenarios. Over the past 13 months (May 2020 – May 2021) and 275 trades, a win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall option premium capture of 85%.

The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk via a beta-controlled manner. The options-based approach circumvented the September 2020, October 2020, and January 2021 sell-offs while outperforming/matching the S&P 500 over the 13-month post-pandemic bull run, posting returns of 58.2% and 61.8%, respectively (Figures 1-5).

Despite these results over the past 13-plus months and 275 trades, limitations and challenges come with any trading system. Specifically, acts of nature, legislative and regulatory actions can jeopardize option trades. Here, I will walk through the five trades that resulted in losses and the underlying reasons as to why these were beyond any remediation efforts. Legislative and regulatory risks are two areas that pose some of the greatest company-specific and/or sector-specific challenges.

Options
Figure 1 – Overall option tickers used from April 2020 – May 2021
Continue reading "Options: 275 Trades and 5 Losses - 98% Win Rate"

Delta And Theta: Probability And Time Decay

Controlling portfolio volatility and reducing overall market risk while generating superior returns relative to the broader market can be achieved with options. Essential to this strategy is a blended options-based approach where 50% cash is held in conjunction with long index-based equities and an options component. Another critical element is setting the probability of success in your favor and leveraging time decay of options via Delta and Theta, respectively.

Acting with skill and caution over ~280 trades and ~13 months, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based/beta-controlled portfolio strategy. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. Options win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall option premium capture of 85% 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 substantially less risk via a beta-controlled manner. The options-based approach circumvented September 2020, October 2020, and January 2021 sell-offs while outperforming/matching the S&P 500 over the 13-months (Figures 2-5).

Delta

Delta serves as a proxy for the probability of success at the expiration of the option contract. Thus, this value is an absolute number; thus, a negative (put side of the option chain) or positive (call side of the option chain) value is irrelevant. The interpretation of Delta is based on 1.0 less the Delta at a given strike. If the Delta is -0.14 on the put side, this translates into 1.0 - (-0.14) = 0.86; thus, a ~86% probability of the trade expires above the strike or is worthless at expiration. If the Delta is 0.20 on the call side, then this translates into 1.0 - 0.20 = 0.80, thus ~80% probability of the expiring below the strike or being worthless at expiration. Selling options near a specific Delta that is out-of-the-money places the statistical edge in your favor. Given enough trade occurrences, the probabilities will play out to reach their expected outcome. Thus, trading at a Delta of 0.15 will yield a winning trade success rate of ~85% if all trades go to expiration (Figure 1). Continue reading "Delta And Theta: Probability And Time Decay"

Beta-Controlled Options Portfolio

Controlling portfolio beta (a measure of volatility or systemic/market risk of a portfolio compared to the market on the whole) while generating the same or superior returns can be achieved with options. A beta-controlled portfolio can be achieved via a blended approach where 50% cash is held in conjunction with long index-based equities and an options component.

Over the past ~13 months, post COVID-19 induced lows, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based/beta-controlled portfolio strategy. They enable smooth and consistent portfolio appreciation without guessing which way the market will move and allow one to generate consistent monthly income in a high probability manner in various market scenarios. Over the past 13 months (April 2020 – April 2021), 249 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall option premium capture of 85% 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 substantially less risk via a beta-controlled manner. The options-based approach circumvented the September 2020, October 2020, and January 2021 sell-offs while outperforming/matching the S&P 500 over the 13-month post-pandemic bull run, posting returns of 58.2% and 61.8%, respectively (Figures 1, 2, and 3).

options

Figure 1 – Overall options-based performance compared to the S&P 500 from April 2020 – April 2021
Continue reading "Beta-Controlled Options Portfolio"