POSTED ON March 18, 2021 BY Noah Kiedrowski
Achieving an options win rate of 98% requires following a core set of 10 basic rules supplemented by some general guidance. Following these rules while deploying an array of option types (i.e., put spreads, call spreads, iron condors, and diagonal call/put spreads) across a diverse large-cap ticker list is the foundation of this success. Staggering expiration dates, managing winning trades, keeping trade allocation in balance with overall portfolio size, and trading in tickers that are liquid in the options market are other critical components to this success. Sticking to high probability outcomes via leveraging delta as a proxy, layering in some basic technical analysis, and maintaining appropriate portfolio structure is essential while ideally maintaining a 50% cash in addition to a hybrid long equity/options approach.
Options Trading Framework - 10 Essential Rules
A set of trading fundamentals must be followed to run an options-based portfolio over the long-term successfully. Specifically, position-sizing, sector diversity, maximizing the number of trade occurrences, and risk-defined strategies are some notable areas that traders need to heed for long-term successful options trading.
The following option trading fundamentals must be exercised in every trade. Violating any of these fundamental rules will jeopardize this strategy and possibly negate this approach's effectiveness on the whole. Below are 10 option trading rules that provide a basic framework of options trading to maintain discipline and systematic trading mechanics (Figure 1).
Figure 1 – 10 rules for long-term successful options trading as demonstrated throughout these performance metrics - Trade Notification Service
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. Place probability of success in your favor (delta)
10. Appropriate position sizing/trade allocation
Option Rules - Additions and Refinements
Continuously reflecting and refining the basic framework of options trading is encouraged to ensure continuous improvement and adjusting for lessons learned. The additional guidance will strengthen the initial set of rules to drive better outcomes over the long-term.
Potential Landmines and Anomalies
Following the 10 basic rules with the supplemental guidance cannot guarantee flawless results in the options trading space. One of the biggest threats to options trading is unforeseen stock price excursions, whether it be a black swan event or vertical moves up in the underlying share price that may jeopardize any directional options that are in play at the time of a drastic move. When these situations arise, rolling trades can be performed to reset the probability of success in your favor and allow more time for the price excursion to revert to its mean.
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Achieving an options win rate of 98% requires following a core set of 10 basic rules supplemented by some general guidance. Following these rules while deploying an array of option types (i.e., put spreads, call spreads, iron condors, and diagonal call/put spreads) across a diverse large-cap ticker list is the foundation of this success. Staggering expiration dates, managing winning trades, keeping trade allocation in balance with overall portfolio size, and trading in tickers that are liquid in the options market are other critical components to this success. Sticking to high probability outcomes via leveraging delta as a proxy, layering in some basic technical analysis, and maintaining appropriate portfolio structure is essential while ideally maintaining a 50% cash in addition to a hybrid long equity/options approach.
Options Trading Framework - 10 Essential Rules
A set of trading fundamentals must be followed to run an options-based portfolio over the long-term successfully. Specifically, position-sizing, sector diversity, maximizing the number of trade occurrences, and risk-defined strategies are some notable areas that traders need to heed for long-term successful options trading.
The following option trading fundamentals must be exercised in every trade. Violating any of these fundamental rules will jeopardize this strategy and possibly negate this approach's effectiveness on the whole. Below are 10 option trading rules that provide a basic framework of options trading to maintain discipline and systematic trading mechanics (Figure 1).
Figure 1 – 10 rules for long-term successful options trading as demonstrated throughout these performance metrics - Trade Notification Service
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. Place probability of success in your favor (delta)
10. Appropriate position sizing/trade allocation
Option Rules - Additions and Refinements
Continuously reflecting and refining the basic framework of options trading is encouraged to ensure continuous improvement and adjusting for lessons learned. The additional guidance will strengthen the initial set of rules to drive better outcomes over the long-term.
- Avoid earnings-related events (these events can routinely cause strike prices to be heavily challenged and/or breached post earnings)
- Avoid concurrent option trades on the same underlying ticker (if concurrent trades are placed, ensure an adequate gap between expiration dates and use different strikes)
- Avoid strike widths wider than ~$5 (rolling trades becomes more feasible and will allow better opportunities for closing trades with narrow strike zones)
- Use technical analysis to aid in trade selection such as RSI (Relative Strength Index) and Bollinger bands (this can help identify the trade type to execute, such as iron condors or directional trades such as put spreads or call spreads)
Potential Landmines and Anomalies
Following the 10 basic rules with the supplemental guidance cannot guarantee flawless results in the options trading space. One of the biggest threats to options trading is unforeseen stock price excursions, whether it be a black swan event or vertical moves up in the underlying share price that may jeopardize any directional options that are in play at the time of a drastic move. When these situations arise, rolling trades can be performed to reset the probability of success in your favor and allow more time for the price excursion to revert to its mean.
See This Week's Stock Pick
Experienced analyst carefully scours financial publications, balance sheets, press releases, charts, live events, and more to locate the most liquid, undervalued, and overlooked stocks.
Reveal The Stock of the Week
Results
When compared to the broader S&P 500 index, the blended options, long equity, and cash portfolio has outperformed this index by a significant margin. In even the most bullish scenario post-pandemic lows where the markets erased all the declines via V-shaped recovery, this approach has outpaced the S&P 500 returns through 12MAR21 with substantially less risk
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When compared to the broader S&P 500 index, the blended options, long equity, and cash portfolio has outperformed this index by a significant margin. In even the most bullish scenario post-pandemic lows where the markets erased all the declines via V-shaped recovery, this approach has outpaced the S&P 500 returns through 12MAR21 with substantially less risk
Continue Reading...
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