Options trading can be a powerful tool to generate consistent income while defining risk and leveraging minimal capital.
Fasten your seatbelt trader because in this article we are going to reveal 10 essential rules and additional tips to build a successful long-term options portfolio. Even in volatile markets.
Options Trading in numbers
Returned 47.6% and 43.7% above the S&P 500 in September and October 2020, respectively.
Average profit of 7.8% per trade with a 98% success rate.
Generation of consistent income, even during market declines (in fact, some general data indicates that this methodology was able to overcome the market madness in the face of the COVID19 pandemic with a slightly lower percentage of difficulty compared to other methods)
10 fundamental rules of options trading:
Diversify: Trade a variety of uncorrelated assets and different sectors.
Manage duration: Spread options contracts across different expiration dates.
Sell options in high implied volatility: Take advantage of the moments of greatest market uncertainty. Use the best tools to stay informed at all times.
Manage profits: Close winning trades on time to secure profits. We know how to help you.
Use risk-defined strategies:Limit potential losses on each trade. Here we have an article that may interest you
Maintain a level of cash: Reserve approximately 50% of your capital in cash for flexibility.
Maximize the number of operations: Increase the odds of success in your favor.
Ensure the probability of success: Look for options with favorable delta.
Manage position sizes: Allocates capital appropriately to each operation.
Adapt the rules:Constantly reflect and improve your strategy based on your experience. Share tips and news with your community.
Avoid trading near earnings events that could alter option prices.
Do not carry out simultaneous operations in the same asset with close expiration dates.
Keep strike widths narrow to make it easier to close positions if necessary.
Use Professional technical analysis and bakctesting tools to select your operations.
Risks you should know
Unpredictable events ("black swans") can affect options, especially puts, during sharp market declines.
Also take into account that unexpected regulatory changes may impact specific sectors or companies.
Let's look at a practical example:
Let's say you believe Apple's (AAPL) stock price will remain stable in the coming months. To take advantage of this opportunity, you could sell a call option with a strike of $150 and an expiration date of six months.
If the AAPL share price remains below $150 on the expiration date, you will not have to buy the shares at $150 and therefore will not have any losses. Instead, you will keep the premium you received for selling the option.
Now, if the price of AAPL shares exceeds $150 on the expiration date, you will have to buy the shares at $150, but you will still make a profit. This is because the price of the call option will have increased, which will offset the cost of purchasing the shares.
This way you have limited your risk to the premium you received for selling the option. Plus, you've increased your chances of making a profit, since AAPL's stock price is more likely to remain stable or fall than to rise sharply.
There are many options trading strategies that can suit different investment goals and styles. Let us know in the comments if you want us to bring you some.
We recommend you practice these rules and adapt them to your plan. A resilient and profitable options portfolio is something very valuable that not many can boast.
Let's go for it!
For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez