In this article I want to share how I manage my own Options portfolio.
The advantage of Delta in a smarter Options portfolio is 3-fold: 1. easier to manage 2. better returns over the long term and 3. limiting downside during market downturns.
Understanding the Core of Options Strategy: Delta
Central to any serious options strategy is the concept of delta. No seasoned investor should consider options trading without considering delta, as it’s crucial for risk management and continuous income generation. Delta might seem like a simple concept, but understanding it can significantly impact the way you manage your portfolios.
Many investors use various channels or bands to signal when to enter or exit trades, such as with the S&P 500 Index. These signals can often be misleading. For example, as shown in the chart below, the S&P 500 rarely hit the lower band in 2024—a signal traditionally used by many to enter a trade. Consequently, capital that could have been deployed remains idle due to the infrequency and unreliability of these signals.
In contrast, using delta provides consistent opportunities. The platform I frequently use, Interactive Brokers, makes delta readily accessible through options chains for various stocks. Delta serves as a probability indicator for your stock or ETF reaching the strike price. Or, put simply, your profitability. While delta is the most crucial Greek you can utilize for risk management, others like gamma and theta should not be ignored.
The Benefits of Using Delta
With delta, instead of keeping funds idle waiting for signals, you can identify safer strike prices for options trading. This means continuous earning opportunities. For example, while Keltner Channels might yield opportunities occasionally, delta allows earnings throughout.
Our strategy was continuously earning income, primarily because we knew which strike prices provided safety below the current market value – as shown by the red dots in the chart below. This method allows us to earn monthly income on our favoured stocks and ETFs.
Diversifying and Expanding Your Portfolio
Diversification is vital. When constructing a diversified options portfolio, don’t limit yourself to a handful of commodity stocks or metals. Consider sector ETFs and quality blue-chip stocks. Dividend stocks, high-yield dividend-paying entities, precious metals like gold and silver, oil commodities, and crypto-related ETFs/stocks should form a well-rounded portfolio.
Your strategy shouldn’t only be diversified; it should be versatile too. Leaps, strangles, and credit spreads are advanced strategies that enhance returns and provide protection. Leaps offer control over preferred underlyings at a lower cost. Strangles increase income by simultaneously using calls and puts. Credit spreads provide higher ROI with built-in downside protection.
Enhancing the Options Wheel Strategy
The options wheel strategy is my core approach. Through enhancements using margin and delta, the standard 1-3% monthly returns can be multiplied. In the wheel strategy, you rent out a blue-chip stock via covered calls for income, purchase shares when assigned, and repeat this cycle for ongoing income. Risk management is incorporated with delta and additional hedges like credit spreads.
Embracing the Property Analogy
Approach options like property. Think about optimization and income enhancement akin to property management. Margin operates similarly to a mortgage, using others’ capital to boost income. With moderate margin use, returns can be magnified significantly.
Active Management and Strategic Flexibility
Finally, active management is critical. Instead of letting options expire, consider rolling them strategically to maximize income. I’ve developed numerous risk management rules that enhance income while providing protection. These strategies, which don’t result in permanent loss, are manageable with simple controls.
Explore my step-by-step options guide at options.investlikeapro.co.uk to dive deeper into options strategies. My goal is to empower you with strategies that mitigate risk and optimize returns, driving success in your investment journey.
