In this blog post, we are going to talk about how to optimize your options strategy and allocation based on S&P. The stock market is a tricky beast, and it can be difficult to know how to allocate your resources to maximize profits. By following the tips in this blog post, you will be able to make better decisions when it comes to trading options and stocks.
We will discuss:
- Options Bearish and Bullish Strategies Review
- What percentage should be invested in stock options based on the current S&P?
- Strategy allocation in different market conditions
- Minimum and Maximum Option Strategy Allocations
- What is a Beta Weighted Delta and where should it be based upon the S&P?
- When should option adjustments be made?
- Conclusion
Okay guys, I talk about stock options that should be used for a small percentage of your portfolio. This will ne in an account you want to grow aggressively faster than the market in general. You can make a lot of money using options and you can also lose a lot of money. Especially if you are new and learning. So I recommend never investing more than you can afford to lose. And always recommend for the majority of your saving and retirement utilize your financial planner.
Options Bearish and Bullish Strategies Review
We are going to review the key options strategies that are used in different market conditions. The main strategies are as follows:
Selling Naked Put Options (and Put Vertical Spreads) – Bullish
Selling Naked Call Options (and Call Vertical Spreads) – Bearish
Buying Debit Spreads – Bearish
Selling Strangles (and Iron Condor) – Neutral
Buying LEAPS Options – Bullish
Selling Covered Call Option Strategy – Bullish
What percentage should be invested in stock options based on the current S&P?
The S&P consists of the top 500 stocks so it is a common benchmark for the entire stock market in general. When the S&P is at market lows, we should have a higher percentage invested in the market as a whole. We also should have a higher percentage invested in bullish strategies at this time.
When the S&P is at market highs, we should have a lower percentage of our available funds invested in the market. We should also have a higher percentage of those funds invested in neutral and bearish strategies.
There are no hard and fast rules, however, these are recommended guidelines that I like to stay fairly close to. They are based upon the percentage that the S&P (we will use the SPY ETF) is above or below the trend line. Drawing trend lines is a course in itself and they change. However, going back to 2008, let’s look at the SPY chart below. We see that the current $410 SPY price is fairly valued but on the mid to high end of the trend area.
With IVR currently high, I want to be pretty well invested in the market using a lot of neutral strategies. Since we are just about in the range of the trend line we will want to have no more than about 70% invested in the market. This way we have a little left to invest if there is a huge drop in the market and it should also be able to cover our losses as long as we used some vertical strategies with stop losses.
When the market is at all-time highs and 30-50% above the trend lines, I like to have a lot of money on the sidelines waiting for a drop. With the market at highs the risk is much more to the downside versus the market skyrocketing up further.
At the same time, when the market is at lows and 30-50% below the trend lines I like to be all in. By “all in” I mean up to 85% or so invested. We should always have 10-15% available cash in the account to cover if necessary. With the market at lows the risk to further downside is limited.
Strategy allocation in different market conditions
When the market is at lows we will utilize more bullish strategies like selling naked puts, buying LEAPS, and selling covered calls. When the market is at highs, we will utilize more bearish strategies like selling naked calls and buying debit spreads.
And when the market is in-between we can use a mix of all strategies or a mix of bullish and bearish strategies. We will also typically be selling more strangles and iron condors since they are neutral strategies.
What is a Beta Weighted Delta and where should it be based upon the S&P?
Beta Weighting is a means for investors to put all of their positions into one standard unit. It is a way to look at an entire portfolio and understand how it will change with a move in the market. It tells us about the size, diversity and general risk of our positions.
If you have an AAPL trade with a +50 delta, then you’ll gain $50 per $1 increase in the stock.
But that +50 delta is specific to a $1 move in Apple.
Suppose you also had a bullish MSFT trade with a +20 delta. That means you’ll make $20 per $1 increase in Microsoft stock.
As a general rule, I like to stay delta neutral for the most part. However, when the market is at highs or lows I may adjust to be slightly more bullish or bearish. So as you can see from the chart above, I like to keep a couple of hundred positive deltas on when we are 40 or 50% below the S&P trend lines. Likewise, when we are 40-50% above the trend lines I like to keep a couple of hundred negative deltas on.
I will then use more neutral strategies like strangles and iron condors when we are slightly above or below the trend lines. By doing this, I can stay under 100 positive or negative deltas. This will be close to neutral overall in the stock option portfolio.
Conclusion
By following these simple rules we can adjust our options strategies and allocations to fit the current market conditions. This will help us stay ahead of the market and make money whether it is going up, down or sideways.
Remember to always stay within the allocation rules to protect your gains and limit your losses. You will then have cash available when opportunities present themselves. And lastly, don’t be afraid to take profits when you have them. The goal is to make money and by following these simple rules we should be able to do just that.
If you have any questions feel free to leave them in the comments below or contact me directly. I’d be happy to help you further customize your options strategies and allocations.
Cheers,
Darren Steves
Email: darren@darrensteves.com
Twitter: @Darren_Steves
web: https://darrensteves.com/