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Options Portfolio Management

When buying stocks in a cash account, you can go all in and be fully invested. But when you are buying stocks on margin and, on top of that, trading unsecured options, proper options portfolio management is a must.

I learned my lesson the hard way when, during the raging bull market, I invested everything in stocks and sold naked strangles. Then, the market turned bearish, and I was sweating to keep it afloat. And it cost me a lot of money!

Portfolio management doesn’t have to be complex. It is simple. What is difficult is the self-discipline to follow the rules.

When trading options, you will need a margin account (unless you plan to trade only basic strategies such as covered calls and cash-secured puts). And margin will throw a wrench into investors’ simplistic thinking. It all suddenly becomes complex and scary.

If you decide to trade SPX trades with us (subscribe) or on your own, you will need a set of rules to follow, such as allocation, positioning, cash management, and scaling the trades.

Here are the rules I set up for our portfolio (though I must admit, in 2021 mania, I too became reckless, and I am still cleaning up the mess):

Options Portfolio Management – Cash allocation


Cash allocation in portfolio management was my most significant issue. I hated to keep cash in a brokerage account, earning nothing. This drove my urge to be fully invested, although I knew it was wrong.

The rule is to keep 30% of the entire portfolio in cash but invest in a cash equivalent ETF. Some brokers, such as Fidelity, offer suitable money market ETFs that earn a good interest (currently up to 4.25%, not much, but better than nothing). Others don’t provide anything, and the cash makes zero return.

In this case, I use short-term bond ETFs such as ICSH and SGOV. They hold value during turbulent times and pay a decent yield.


Options Portfolio Management – Options position sizing


No matter how much money you have in your account, set a realistic position sizing. If we keep 30% of our portfolio in cash, then put 20% of your portfolio for options trading.

If 20% appears to be too large for you and you feel scared to deploy it, then go smaller. You can always scale up later.

Once you have the amount set, determine the trades you would trade. I decided to sell one Iron Condor contract with 2 DTE and $5 wide spread, one Iron Condor contract with 7 DTE and $5 wide spread, and one Iron Condor contract with 30 DTE and $5 wide spread.

That means over a month-long period, I trade 13 trades and risk no more than $1,500 on any given day or week. And I keep trading these positions again and again. I open new trades only when the old ones expire (or if I have to roll them, then after they finish, too). Do not scale the trades!


Options Portfolio Management – Scaling up


Do not scale trades up! At least not initially. Keep trading the same trades repeatedly, and do not use proceeds from your previous trades to open more trades! This is a common mistake and a trap everyone can easily fall into. Look at it this way: you trade Iron Condors, and you are successful in 9 trades, but the 10th trade can wipe out those trades if something goes wrong. And if you scale your trades up, you can wipe out not only the previous nine trades but your entire portfolio.

Instead, use your proceeds to buy other investments.

When can you scale up? Once all your allocations are met, then you can scale up.


Options Portfolio Management – Equity Allocation


Start building your portfolio base by buying good companies. Use proceeds from the options to buy stocks. Do not gamble with these stocks. Do not buy penny stocks or high-flying growth stocks. This should be your base, not a roller coaster. Since you will purchase these equities in a margin account, stock market fluctuations will still give you a headache, even with these lazy, good-quality stocks. But if you blow your options trading, you will not blow your entire account!

I blew my account many times, and this strategy saved my account often. After I wiped out cash for options trading, I still had enough equity in good-quality stocks.

I keep 50% of my account in dividend-paying stocks as my base.


Options Portfolio Management – Summary


To summarize these rules, this is what I do in my accounts:

  • Build and keep 30% in cash equivalents such as ICSH or SGOV ETFs. When the markets rallied, I added more cash to stay at 30% or buy long-term equities. When the markets crash, I start selling ICSH or SGOV to release cash and buying power to avoid margin calls.
  • Build 50% of the portfolio in long-term, good-quality stocks. I prefer dividend stock, so they also generate cash. I never sell these positions unless I must satisfy margin requirements. But once the margin requirements are satisfied, I immediately buy these positions back.

  • Use 20% of the portfolio for options trading. I do not necessarily use it all, but start small and add slowly.

  • Use proceeds from options trading to buy cash ETFs and dividend stocks.

  • Scale your options trading up only when your other allocations are met. You have 30% in cash, 50% in equity, and more cash on hand. Then, slowly add more trades.

  • Scaling up options trades could be widening the spreads (for example, going from a $5 to $10 spread) or adding more contracts. If you are unsure and not ready to scale up, keep unused funds in cash. For example, I “save” all unused funds and proceeds from options trading in the ICSH fund, while I save 30% cash in the SGOV fund.

Following these rules will save you a lot of headaches when the markets crash or go into a bear market. You will also have enough cash on hand to buy stocks if a great opportunity arises (and lately, there was a lot of opportunity, but I was out of money).


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