Options only portfolio money management and diversification

Interesting ... may I ask what's your preferred/median days to expiration? When you say you don't have stops, does it mean you let them expire?
 
qlai said:
Interesting ... may I ask what's your preferred/median days to expiration? When you say you don't have stops, does it mean you let them expire?
More...
I use monthly options 3 months out I don’t let anything expire I sell with above market limits
 
qlai said:
I'm surprised that second person buys premium. Isn't it just leveraging your directional trading? Perhaps low volatility and the bull market make it work, but who am I to judge from the sidelines! Anyway, how do you diversify then? Do you do it by expiration? Do you do it by choosing un-correlated instruments? I can't imagine watching 100%
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As I dont trade for a living nor do I exclusively trade options hence I avoided responding to your thread. However options are the instrument I trade most frequently. As someone averred above trading is 98% psychology and 2% luck, I try and play to both. As you mention its hard to sit and watch your portfolio if you trade options, learning to let your winners run is even harder than learning to cut your losses.

My main strategy is to trade in what I understand and avoid what I do not. I dont touch futures for this reason, I dont get them and cant be bothered to learn. This is my current approach:

  • leveraging directional trade, the largest chunk of my portfolio are directional trades using option leverage. The stocks are chosen based on momentum - crudely put its the assumption that last year's winner is on average also this year's winner, the actual basis of my choices is a little more sophisticated but you get the idea. Key elements to manage risk:
  1. at the start no position is more than 2.5% usually less of the portfolio. I hold about 40 positions at any one time;
  2. the options are running fairly long between 6 months to a year give or take a little depending on the stock. An AMZN option for JAN19 for example would exceed the 1) criterion for example so I would choose a shorter one;
  3. the strike is chosen based on a simple equation: I add the ATM premium to the ATM strike and choose that strike. Hence if XYZ trades at 100$ and the Jan19 call is trading at $5, I would purchase the 105$ strike;
  4. Options will be rolled 2-3 months before they expire to avoid excessive theta losses;
  5. Positions are closed/rolled if the momentum of the stock is broken or when the value >5% of portfolio.
  • In the current bull market this has been a huge winner - in a bear market I stay out altogether. Managing the losers is not so hard - managing the winners is. Deciding when to reduce exposure is pretty tough - when you start out your downside isnt so bad as the delta is 0.3/0.4 but once you get to 1 delta a downswing is painful. At the moment I am struggling with this as I foresee that should the Nasdaq drop 10% I might lose 75% on my positions. Thats the effect of leveraging and the fact I do have a bias to industries I understand mainly tech and classic industrial companies.
  • As I admit its hard to sit and watch your portfolio - one gets the urge to trade when the above positions are up day 15% but the point is to wait and use the option time left to get 200% on a position. So to satisfy my trading urges I trade volatility on events, mainly:
  1. using event driven volatility increases in option prices - mainly ahead of earning or other announcements - but sometimes just probability driven (when is Elon Musk tweeting again?)
  2. trading volatility collapse on expiration day - generally with ratio trades or similar strategies;
  3. some TA driven positions - MA crossings mainly
  • These positions are short term usually a week or two no more. Trading costs actually are rather high in my opinion but the returns are reasonable. This is no more than 10% of the portfolio usually much less. I try to learn about other event driven volatility increases such as FDA announcements but my knowledge is still lacking to do this in real. It certainly occupies the mind :-)
  • The final batch in the options portfolio is some non-directional trades, Mainly monthly Iron Condors on the index and some strangles, straddles or ICs on individual stocks. Its a straight out probability bet and I adjust positions or close out if the downside is being challenged too much. Returns are about 20% a year on this. The added advantage is that these strategies lock up cash that cannot otherwise be traded and therefore limit potential overleveraging of myself by letting position size and underlying value expand beyond my comfort zone.
The above is matched by a conservative 5 sector index tracker portfolio and a bunch of equities chosen on value investing criteria. No matter how hard I try - the options portfolio will usually balloon to be 2/3 of the grand total.

The different strategies counterbalance each other somewhat and my human weaknesses are no doubt apparent to the hard core traders here. It works for me is all I can say, I have good enough results and sleep soundly.
 
TrustyJules said:
As I dont trade for a living nor do I exclusively trade options hence I avoided responding to your thread. However options are the instrument I trade most frequently. As someone averred above trading is 98% psychology and 2% luck, I try and play to both. As you mention its hard to sit and watch your portfolio if you trade options, learning to let your winners run is even harder than learning to cut your losses.

My main strategy is to trade in what I understand and avoid what I do not. I dont touch futures for this reason, I dont get them and cant be bothered to learn. This is my current approach:

  • leveraging directional trade, the largest chunk of my portfolio are directional trades using option leverage. The stocks are chosen based on momentum - crudely put its the assumption that last year's winner is on average also this year's winner, the actual basis of my choices is a little more sophisticated but you get the idea. Key elements to manage risk:
  1. at the start no position is more than 2.5% usually less of the portfolio. I hold about 40 positions at any one time;
  2. the options are running fairly long between 6 months to a year give or take a little depending on the stock. An AMZN option for JAN19 for example would exceed the 1) criterion for example so I would choose a shorter one;
  3. the strike is chosen based on a simple equation: I add the ATM premium to the ATM strike and choose that strike. Hence if XYZ trades at 100$ and the Jan19 call is trading at $5, I would purchase the 105$ strike;
  4. Options will be rolled 2-3 months before they expire to avoid excessive theta losses;
  5. Positions are closed/rolled if the momentum of the stock is broken or when the value >5% of portfolio.
  • In the current bull market this has been a huge winner - in a bear market I stay out altogether. Managing the losers is not so hard - managing the winners is. Deciding when to reduce exposure is pretty tough - when you start out your downside isnt so bad as the delta is 0.3/0.4 but once you get to 1 delta a downswing is painful. At the moment I am struggling with this as I foresee that should the Nasdaq drop 10% I might lose 75% on my positions. Thats the effect of leveraging and the fact I do have a bias to industries I understand mainly tech and classic industrial companies.
  • As I admit its hard to sit and watch your portfolio - one gets the urge to trade when the above positions are up day 15% but the point is to wait and use the option time left to get 200% on a position. So to satisfy my trading urges I trade volatility on events, mainly:
  1. using event driven volatility increases in option prices - mainly ahead of earning or other announcements - but sometimes just probability driven (when is Elon Musk tweeting again?)
  2. trading volatility collapse on expiration day - generally with ratio trades or similar strategies;
  3. some TA driven positions - MA crossings mainly
  • These positions are short term usually a week or two no more. Trading costs actually are rather high in my opinion but the returns are reasonable. This is no more than 10% of the portfolio usually much less. I try to learn about other event driven volatility increases such as FDA announcements but my knowledge is still lacking to do this in real. It certainly occupies the mind :)
  • The final batch in the options portfolio is some non-directional trades, Mainly monthly Iron Condors on the index and some strangles, straddles or ICs on individual stocks. Its a straight out probability bet and I adjust positions or close out if the downside is being challenged too much. Returns are about 20% a year on this. The added advantage is that these strategies lock up cash that cannot otherwise be traded and therefore limit potential overleveraging of myself by letting position size and underlying value expand beyond my comfort zone.
The above is matched by a conservative 5 sector index tracker portfolio and a bunch of equities chosen on value investing criteria. No matter how hard I try - the options portfolio will usually balloon to be 2/3 of the grand total.

The different strategies counterbalance each other somewhat and my human weaknesses are no doubt apparent to the hard core traders here. It works for me is all I can say, I have good enough results and sleep soundly.
More...
Sounds like a good plan
 
spy guy said:
yes I am one of those who make a living trading options. I use 100% of capital and sometimes I am 100% in the market with options. I only buy calls or puts directional and sell as soon as I have a good profit. some days I am 100% out of the market, I only stay in a short time same day out up to weeks. my secret buy low sell higher. the trick is what is high or low. what works for me is getting a feel for the movement of the market, you can if you follow it daily. I now have 112 winning trades in a row , you can too when you get the feel of the movement. I don't use stops because I buy right and limit risk by being out of the market a lot. good luck keep at it don't think you cant do it
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Good for you!

I think I understand and agree with your strategy.:D
 
qlai said:
It's been said that options premium selling (or any short gamma strategy) is equivalent of "eating like a bird and shitting like and elephant." In other words, they take all their volatility at once which causes them to blow up.

Most online advise I follow teaches to sell premium. Then they say invest only about 50% of total capital. They say try to diversify, but I don't think it's as easy to do with options as with futures/equities. So I have an impression that individual/retail option trading is for people trading with play money or ex traders who just trade part of previously earned pot to juice up returns. Are there any traders making living trading options ONLY portfolios (not OPM) investing up to 100% of their capital? How do you mitigate risk? How do you position size and diversify when, essentially, you are either long volatility or short volatility? I realize volumes could be written on this subject and that my assumptions may be naive/invalid, but that's the point of the post. Thank you.
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I only buy options and it is working out fine for me.
 
TrustyJules said:
As I dont trade for a living nor do I exclusively trade options hence I avoided responding to your thread. However options are the instrument I trade most frequently. As someone averred above trading is 98% psychology and 2% luck, I try and play to both. As you mention its hard to sit and watch your portfolio if you trade options, learning to let your winners run is even harder than learning to cut your losses.

My main strategy is to trade in what I understand and avoid what I do not. I dont touch futures for this reason, I dont get them and cant be bothered to learn. This is my current approach:

  • leveraging directional trade, the largest chunk of my portfolio are directional trades using option leverage. The stocks are chosen based on momentum - crudely put its the assumption that last year's winner is on average also this year's winner, the actual basis of my choices is a little more sophisticated but you get the idea. Key elements to manage risk:
  1. at the start no position is more than 2.5% usually less of the portfolio. I hold about 40 positions at any one time;
  2. the options are running fairly long between 6 months to a year give or take a little depending on the stock. An AMZN option for JAN19 for example would exceed the 1) criterion for example so I would choose a shorter one;
  3. the strike is chosen based on a simple equation: I add the ATM premium to the ATM strike and choose that strike. Hence if XYZ trades at 100$ and the Jan19 call is trading at $5, I would purchase the 105$ strike;
  4. Options will be rolled 2-3 months before they expire to avoid excessive theta losses;
  5. Positions are closed/rolled if the momentum of the stock is broken or when the value >5% of portfolio.
  • In the current bull market this has been a huge winner - in a bear market I stay out altogether. Managing the losers is not so hard - managing the winners is. Deciding when to reduce exposure is pretty tough - when you start out your downside isnt so bad as the delta is 0.3/0.4 but once you get to 1 delta a downswing is painful. At the moment I am struggling with this as I foresee that should the Nasdaq drop 10% I might lose 75% on my positions. Thats the effect of leveraging and the fact I do have a bias to industries I understand mainly tech and classic industrial companies.
  • As I admit its hard to sit and watch your portfolio - one gets the urge to trade when the above positions are up day 15% but the point is to wait and use the option time left to get 200% on a position. So to satisfy my trading urges I trade volatility on events, mainly:
  1. using event driven volatility increases in option prices - mainly ahead of earning or other announcements - but sometimes just probability driven (when is Elon Musk tweeting again?)
  2. trading volatility collapse on expiration day - generally with ratio trades or similar strategies;
  3. some TA driven positions - MA crossings mainly
  • These positions are short term usually a week or two no more. Trading costs actually are rather high in my opinion but the returns are reasonable. This is no more than 10% of the portfolio usually much less. I try to learn about other event driven volatility increases such as FDA announcements but my knowledge is still lacking to do this in real. It certainly occupies the mind :)
  • The final batch in the options portfolio is some non-directional trades, Mainly monthly Iron Condors on the index and some strangles, straddles or ICs on individual stocks. Its a straight out probability bet and I adjust positions or close out if the downside is being challenged too much. Returns are about 20% a year on this. The added advantage is that these strategies lock up cash that cannot otherwise be traded and therefore limit potential overleveraging of myself by letting position size and underlying value expand beyond my comfort zone.
The above is matched by a conservative 5 sector index tracker portfolio and a bunch of equities chosen on value investing criteria. No matter how hard I try - the options portfolio will usually balloon to be 2/3 of the grand total.

The different strategies counterbalance each other somewhat and my human weaknesses are no doubt apparent to the hard core traders here. It works for me is all I can say, I have good enough results and sleep soundly.
More...
:thumbsup::thumbsup::thumbsup: Thank you for sharing.

As a non professional options trader I could not match the professionals on complex options strategies and came to the conclusion that keeping things simple is my key to survival.

I trade simple options by making directional bets. I do both long and short, calls and puts based on my opinion. I don't trade indices, only individual equities. I don't use TA but FA for trade selection.

Trade size is critical, therefore I now do fraction Kelly.

Regards,
 
ironchef said:
:thumbsup::thumbsup::thumbsup: Thank you for sharing.

As a non professional options trader I could not match the professionals on complex options strategies and came to the conclusion that keeping things simple is my key to survival.

I trade simple options by making directional bets. I do both long and short, calls and puts based on my opinion. I don't trade indices, only individual equities. I don't use TA but FA for trade selection.

Trade size is critical, therefore I now do fraction Kelly.

Regards,
More...
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Ironchef, may I ask if you don't mind:
1: what percentage of your total trading account do you use for each trade?
2: do you use a Sell Limit Profit at least Equal to your Stop? Reward to Risk 1/1 ?
3: And finally, are you winning at least a little more than half your trades?

Thank you,
Jeff
 
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