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"
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"
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"
Options can provide an alternative approach to the traditional buy and hold for the long-term strategy. Options can add value to one’s portfolio in a variety of ways, specifically, maintaining liquidity via maintaining cash to engage in covered put options, initiating positions via being assigned shares strategically prior to or upon expiration of the option contract and capturing premium income via closing out the contract prior to expiration as the shares move in your favor to realize income. Here, I’ll discuss these three different scenarios and strategies behind each one with real life examples.
Maintaining Liquidity and Capturing Premium Income
Maintaining liquidity is integral to any portfolio as cash can be deployed in opportunistic scenarios to capitalize on sell-offs or adding to a long position that has corrected to lower cost basis. Covered puts can be implemented as a means to leverage cash on hand to sell contracts that are covered by cash. This cash would be deployed in an effort to maintain this cash balance yet be put to work via an option contract. This 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. Once the contract expires, the covered cash allocated to the contract will be freed in addition to the cash that was realized from the option premium at expiration. This scenario will allow cash reserves to be maintained while adding cash via covered put contracts. Continue reading "Covered Puts: An Alternative To Buy and Hold"
I’ve written numerous articles on options trading and how one can leverage options over the long-term to mitigate risk, generate income and accentuate returns. Leveraging options to supplement portfolio returns can make a meaningful impact on overall returns, especially over the long-term. Here, I’ll focus on covered calls and covered puts with corresponding lessons learned over the course of the past year with empirical data.
Covered calls are intended to leverage a stock position while extracting value on a consistent basis via selling option contracts against that position and collecting premium income in the process. I liken this to a landlord renting a room for monthly income, however, in this case, one is renting the stock. The option contract is structured with the option seller (stock owner) collecting a premium in exchange for the right for the option buyer to purchase the shares of interest at an agreed upon price by an agreed upon date for a premium (income that the option seller will receive). In this scenario, the stock owner doesn't believe that the shares will appreciate beyond the agreed upon price and thus be able to collect income while retaining the shares and dividend rights. The option buyer believes that the shares will appreciate beyond the agreed upon price and be able to buy the shares at a lower price than the market currently trades.
Covered puts involve leveraging a cash position that one currently has on hand and collecting a premium in exchange for the obligation to purchase one’s shares at an agreed-upon price prior to an agreed upon date. If the stock falls below the agreed-upon price prior to the agreed upon date, then the individual that bought the contract from you will force the obligation (that you agreed to) for you to purchase the shares. In this case (when the stock falls throughout the contract lifespan), the shares can be sold to you (the put option seller) at a higher price than the market. However, if the shares rise in value then the shares will remain with the owner and the put option seller will keep the premium income and the cash earmarked for the potential purchase of the shares will be freed. Why exercise the contract and sell the shares to you (option seller) at a lower price when one can sell the shares on the open market at a higher price? Continue reading "Covered Calls and Covered Puts - Empirical Results and Lessons Learned"