Generating Consistent Monthly Income - 98% Win Rate
Generating consistent monthly income in a high probability manner in both bear and bull markets is the luxury of options trading. The core of options trading is defining risk, leveraging a minimal amount of capital and maximizing returns. Options enable smooth and consistent portfolio appreciation without guessing which way the market will move. An options-based portfolio performance demonstrate the durability and resiliency of options trading as a means to drive portfolio results.
An agile options-based portfolio is essential to navigate pockets of volatility and mitigate market downdrafts. The recent September correction, October nosedive and election volatility into November are prime examples of why risk management is paramount. Despite the recent market volatility, positive returns in all three market scenarios were generated. Over the past 6-plus months, 171 trades were placed and closed. An options win rate of 98% was achieved with an average ROI per trade of 7.6% and an overall option premium capture of 89% while matching returns of the broader market and outperforming during market downswings (Figures 1 and 2).
Figure 1 – Overall option metrics from May 2020 – December 4th 2020 available via a Trade notification service - Trade Notification Service.
Figure 2 – Overall option metrics from May 2020 – December 4th 2020 available via a Trade notification service - Trade Notification Service.
Positive Returns Despite September, October and November Volatility:
The recent September correction, tail end October nosedive and election-induced highly volatile early November provides a great opportunity to demonstrate the durability and resiliency of an options-based portfolio. A positive $1,251 return, a positive $2,585 return and a positive $2,797 return for the options portion of the portfolio was achieved in September, October and November, respectively (Figure 3).
Figure 3 – Generating consistent income despite negative returns for the S&P 500 index
The positive options returns were in sharp contrast to the negative returns for the overall market in September and October. Generating consistent income without guessing which way the market will move with the probability of success in your favor has proven successful despite these market conditions.
When compared to the broader S&P 500 index, the blended options, long equity and cash portfolio has matched this index. In even the most bullish scenario post COVID-19 lows where the markets erased all the declines inflicted by the pandemic, this approach has kept pace with the S&P 500 returns through 30NOV20 with substantially less risk (Figures 4, 5 and 6).
Overall, in the months of May, June, July, August, September, October and November, 1xx trades were placed and closed. An options win rate of 98% was achieved with an average ROI per trade of 7.6% and an overall option premium capture of 89% while outperforming the broader market through the September, October and initial November volatility (Figures 1, 2, 3, 4, 5 and 6).
Figure 4 – ROI per trade over the past ~180 trades available via a Trade notification service - Trade Notification Service.
Figure 5 – Percent premium capture per trade over the last ~180 trades available via a Trade notification service - Trade Notification Service.
Figure 6 – Smooth and consistent portfolio appreciation while matching the broader market gains and outperforming during the market sell-off in September and October. An overlay of an options/cash/long equity hybrid portfolio and the S&P 500. Even under the most bullish conditions, the hybrid portfolio has matched or outperformed the index with a ~50% cash position.
10 Rules for an 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) Trade across a wide array of uncorrelated tickers
2) Maximize sector diversity
3) Spread option contracts over various expiration dates
4) Sell options in high implied volatility environments
5) Manage winning trades
6) Use defined-risk trades
7) Maintains a ~50% cash level
8) Maximize the number of trades so the probabilities play out to the expected outcomes
9) Continue to trade through all market environments
10) Appropriate position sizing/trade allocation
The dual threats of the election and resurgence of COVID-19 cases domestically and abroad were volatility events that investors need to heed. The September correction, tail end October nosedive and initial November volatility reinforces why appropriate risk management is essential. An options-based approach provides a margin of safety while circumventing the impacts of drastic market moves and contains portfolio volatility. Despite these market conditions, consistent monthly income was generated while keeping pace with the broader market returns and outperforming during periods of market weakness.
Sticking to the core fundamentals of options trading, one can leverage small amounts of capital, define risk and maximize return on investment. Following the 10 rules in options trading has generated positive returns in all market conditions for the options segment of the portfolio. The positive options returns were in sharp contrast to the negative returns for the overall market in the month of September and October. This negative backdrop demonstrates the durability and resiliency of an options-based portfolio to outperform during pockets of market turbulence. To this end, cash on-hand, exposure to broad based ETFs and options is an ideal mix to achieve the portfolio agility required to mitigate uncertainty and volatility expansion.
Disclosure: The author holds shares in AAL, AAPL, AMC, AMZN, DIA, GOOGL, JPM, KSS, MSFT, QQQ, SPY and USO. However he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of Stock Options Dad, LLC - www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
Originally published in partnership with INO.com