Proper portfolio construction and optimal risk management is essential when engaging in options trading to drive portfolio results. Managing a long-term successful options-based portfolio requires a risk tolerance balance between cash, long equity and options. Ideally, an options-based portfolio should be broken out into the below structure (This is an example breakdown and percentages can be modified): 

1) ~50% Cash Position - maintaining ample liquidity provides the ability to rapidly adjust when faced with extreme market conditions such as COVID-19.

2) ~30% Long Equity - exposure to long equity via broad-based ETFs (i.e. DIA, QQQ, SPY and IWM) allows participation in market movements in areas that are not covered by cash or options. This enables broad market coverage and its recommended to reinvest all dividend payouts to lower cost basis over time.  

3) ~20% Options - options provide outsized gains thus it's not necessary to overleverage one's portfolio to options trading. This is especially important as markets decline and trades become challenged. Balancing option losses with option wins, long equity and cash is essential.   

Rules For A Successful Agile Options Strategy:

Risk management is paramount when engaging in options trading. A slew of protective measures should be deployed if options are used as a means to drive portfolio results. When selling options and running an options-based portfolio the following guidelines are essential:

  1. Be an option seller and spread expiration dates to collect premium income and avoiding expiration density

    • Continuously bring options income into the portfolio​ while spreading risk

  2. Set the probability of success (delta) in your favor (70%, 85%, etc.) to ensure a statistical edge

    • Trade options that with predicted outcomes at expiration using delta as a proxy for success​

  3. Manage winning trades by closing the trade and realizing profits early in the option lifecycle

    • realize profits and re-purpose the capital towards additional trades ​

  4. Sell options in high IV Rank environments to extract rich premiums

    • IV implosion or IV reversion to the mean allows for profits to be taken early ​

  5. Sell options on tickers that are liquid in the options market

    • Liquidity ensures trades can be filled with tight bid-to-ask spreads​

  6. Maximize the number of trades to allow the expected probabilities to play out

    • Occurrences need to be maximized to mirror predicted outcomes​

  7. Appropriate position sizing / portfolio allocation to manage risk exposure

    • 1-3% of your portfolio should only be used for any given trade ​

  8. Sell options across tickers with ample sector diversity

    • Sell options across uncorrelated tickers/sectors to spread risk ​

  9. Keeping an adequate amount of cash on hand (~50%)

    • Cash insulates your portfolio from any major market swings and allows quick rotations if needed ​

  10. Risk-defined trades (put spreads, call spreads and iron condors) 

    • Define risk with predicted losses and gains at expiration ​

Cash Flexibility is Essential:

Holding ~50% cash as a protective measure is essential when faced with unpredictable outlier situations such as COVID-19. A cash position this high is possible because options are a leveraged vehicle thus minimal amounts of capital can be deployed to generate outsized gains with predictable outcomes. Even deploying all the protective measures outlined above won’t offer the protection required during a black swan event. During these black swan market meltdowns, all sectors and stocks homogenize and naturally correlate together in a downward spiral. Cash is the safest way to immunize a portfolio from these types of market crashes. This cash position also provides optionality to go long stock in high quality names when faced with extreme sell-offs.    

Keyboard and Mouse

Actionable daily trade notification service for all opening and closing trades with commentary 

Bar Chart

All-inclusive offering

perfect for those seeking to remove the guesswork in options trading


70 large cap tickers and ETFs sortable by key technicals and dates to aide trade selection  

Noah Kiedrowski 
Founder and Managing Member

Stock Options Dad LLC

A Registered Investment Advising (RIA) firm

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