Portfolio Strategy Rules

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Below is a summary of my portfolio strategy rules. The goal of my strategy is to find an appropriate balance between returns and risk. Rules will be added, removed, or modified as needed. In this post I will keep track of the strategy rules and any changes made over time.

Portfolio

  • Maintain a delta neutral portfolio
  • Allow up to +/- 50 delta’s per $10,000 of account value
  • Target a portfolio correlation of 0.5
  • Generate returns through short options premium,
    candlestick/price pattern trading, dividends, and stock appreciation
  • Use the following 3 high-level strategies: options selling, candlestick/price pattern trading, long term buy-and-hold.
  • Portfolio composition should be 75% buy and hold and 25% cash/options margin.

Options Trading

  • Dynamic positioning based on IVR
    • If IVR less than 30 then use 0.3x maximum leverage at 10 delta
    • If IVR is between 30 and 50 then use 0.6x maximum leverage at 20 delta
    • If IVR is greater than 50 then use 1x maximum leverage at 30 delta
  • Close a position or roll to next expiration when…
    • There are 14DTE left in the position
    • 50% of profit has been achieved
  • Roll positions up/down and out in time when they are tested
  • Only roll a position that is being tested at its break-even
  • When defensively rolling try to reduce delta’s to at least 30
  • Order of defensive rolling:
    • 1) Roll to straddle
    • 2) Roll out to next expiration
    • 3) Roll into inverted strangle
    • 4) Initiate an entirely new position or close altogether (depending on current IVR)
  • Once a position has been defensively rolled inverted, if it is tested again, initiate an entirely new position that is a standard 16-30 delta strangle or close altogether if the IVR is too low.
  • No single correlation group of more than 1x account size
  • Target 0.2% of account value in positive theta
  • Only sell options in highly liquid markets. Ideally 1 cent spread per $100 of underlying
  • Use options to adjust delta’s in high IV environments and static delta’s in low IV environments

Candlestick/Price Action Trading

  • Trade daily candlesticks
  • Risk no more than 0.5% of total account value per trade
  • Only trade 1:2 R:R or greater setups
  • Use split strike synthetic and vertical spread options strategies to further reduce risk

Buy and Hold

  • 3% or greater dividend yield
  • PEG ratio lower than 1.5
  • Trailing PE and forward PE lower than 20
  • Average annual growth rate of 15% over the past 5 years
  • Beta of 1 or less
  • Stocks in sectors and industries that historically perform well during bear markets
  • A single stock should not be greater than 10% of the total account value
  • Weight my stock holdings based on the GSCI Commodities Index vs S&P500. When the ratio is near 1 my holdings should be about 2/3 commodity-based and when it is near 8 my holdings should be about 1/3 exposed to commodity-based.