How much of a port is reasonable for options?

Investing Strategies Options - You Make the Call
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General question for Options people based on my plans for ‘the future ™’. I am doing ok with my options process and still pulling good to great yearly returns overall. I am moderately risk adverse and I only use options on stocks I understand. So, this is not straight up day trading of options or min max returns on options. I also do not use margin, so my question is more of, how much of the invested portfolio is in options.

I am sitting at about 50% my actively managed monies, but really only about 8% of all of my retirement monies. The actively managed part has been growing over time as I start to have the capacity to run options on stocks in the three digits range. (Last few years I was lucky to afford options on stocks in the tens of dollars, but now I have moved into a couple in the hundreds of dollars.) ((So still very tiny numbers compared to pro options traders.)

Basically just looking to see what other people are comfortable with and if I am getting too wild in my old age. :slight_smile:

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That’s an interesting question…

Personally, my account with options has grown to be my largest overall non-retirement account. That said, as it got larger, the absolute level of volatility also got larger, to the point where I had to add “ballast” to keep it manageable.

As a result, when it came time to set up a bond ladder, I set it up in the same account as my options investments. I now largely fund that bond ladder from the “extra” cash generated from rolling those options (when “extra” cash is generated). Linking the two now limits the potential growth of the options portion of the portfolio, but it has also made it far easier to manage the volatility.

Now that it’s in place, I typically find that when the market is doing well, I build up both the bond ladder and the amount in options. When the market is not doing well, I tend to shift from “building” the account to trying to “maintain” the account. In maintenance mode, I’ll let interest and options premiums (and for now, maturing bonds) collect as cash. When things go particularly poorly, I’ll shift into “preserve” mode, which generally involves rolling the options down and out early.

Since getting the bond ladder built out, I haven’t had to shift to “controlled liquidation” mode for the options, but that remains a possibility if things get particularly awful.

Aside from the volatility, the big problem I’m starting to face now is the fact that options expire, which forces frequent transactions and potentially taxable events. Up until this year, I’ve been able to cover those taxes from other sources, but that may change in the future, particularly in good market years.

So to bring it back to your original question… What I’ve found is that as options have increased as a portion of my investments, there are more factors that I have to manage. Thus far, I’ve been able to find ways to make it work. That said, it certainly creates a set of first world problems that have to be addressed.

Regards,

-Chuck

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Here are the things that you need to consider:

  • You may not realize, but your option trades are margin trades, even if you do cash covered puts, or covered calls.
  • Before you realize you will start chasing premium. So, it is important you are well capitalized or your trades should be proportionate to the capital.
  • After couple of decades, I am now switching to spreads, and trying to reduce the number of transactions, focus more on positive setup’s, or setup’s that I like.
  • Option trading is addictive, it gives chemical reaction similar to dopamine. Most folks, end up over-trading. I was most certainly guilty of that. It is the trades, I placed when bored and wanted some actions, have caused me bigger losses.
  • Option trading requires significant mental capacity. If you are old, planning to enjoy your life, going for golf, lots of travel, etc, you may want to rethink.
  • I cannot emphasize enough Discipline and risk management. Because they are time sensitive, you need to be able to react quickly, willing to take losses, etc.

Good Luck.

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My options activity (cash secured puts n covered calls - AKA Wheel Strategy) fluctuates between 5% n 10-12% of port.

Usually it’s 5-7%.

My basic goal is enough income, post tax to cover frivolous purchases.

My secondary goal is to replace my monthly expenses IF MY PRIMARY INCOME SOURCE WERE TO DRY UP.

For me, Options are another leg on my retirement income stool. I don’t need it, but I’m glad to have the skill set.

If push comes to shove, I’ll use enough of my port to meet the “replace monthly expenses” goal.

The SWR 4% rule of thumb … you can retire when 4% will cover monthly expenses.

I find that Wheel Strategy Options easily covers that amount, while only using a small percentage of my port.

I like @XMFBigFrog suggestion to build bond ladder with options gains.

So far, I’ve added to my LTBH capital gains strategy, with any (post frivolous expenses) excess. I’ve also gifted some excess.

@Kingran is correct - Options is a dopamine rush.

:frog: :potable_water: :teapot: :man_genie:

ralph

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Great feedback everyone. I did join the TMF options service for a couple of years to ‘learn’ the basics and see what the service would recommend as goals and targets. I could only ever follow the ones that were allowed in my Roth IRA port, so no margin and none of the fancier stuff.

But, I did see what responsible trading should look like and I have continued to learn on my own over time. As for chasing premiums, I really really look for a minimum return that is 5-10% away from the current in the money stuff. I want to allow for fluctuations and minimize the number of times I am assigned. But, I also have a very small basket of stocks I do options on. I am not out shopping screeners and hot tips to boost my returns. I have 7-10 stocks I like, meaning I understand the companies, I know what they are doing and I am fine with owning or letting go because volatility will bring it back to me. There are about 5-6 on my research list.

As for what to do with the premiums, I use that to add to the old boring staid stocks like - Mercado Libre, Shopify, Broadcom, Microsoft, and Nvidia. So kinda similar to the bond ladder, but not really. I make sure the returns are adding to the bottom line of the port overall.

It is a fun skill to have, and I am planning to use it into my retirement years to pay for things like vacations or toys. (Hopefully). As for when I do want to do fun things and be away from the computer, I would plan to have them all wind down and not have to worry about it. But, honestly it takes me about two hours a week dedicated and then maybe a few hours spread out over time until I have to reset them all.

Thanks for the feedback.

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I certainly would not be relying on options income to directly fund core living expenses. But, yeah — if you’re looking at it as potential difference maker between flying coach or first class or another such choice firmly rooted in the “extras”, then it may make sense.

Just be sure that you’re not putting too much of your portfolio at risk such that a “black swan” or other major unexpected move could derail more than just the extras in life.

Regards,

-Chuck

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