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Smarter Options Portfolios - A Strategy for Success
Episode 1014th January 2025 • Invest Like A Pro • Manish Kataria
00:00:00 00:10:35

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In this episode I share how I manage my own Options portfolio.

Images referred to in the episode are at: https://investlikeapro.co.uk/podcast/options-delta

Learn how to generate continuous income, use diversified options portfolios, and apply advanced strategies like the options wheel, credit spreads, and using margin to enhance returns while managing risk effectively.

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IMPORTANT: Your Capital is at Risk. Investments may not be covered by the FSCS. This is NOT investment advice - for information purposes only. Please seek advice from a regulated advisor before investing. The value of investments can fall as well as rise - don't rely on past performance.

Transcripts

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Welcome to the Invest Like a Pro podcast, teaching you diversified

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investing with a simple set and forget approach to stocks and options.

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Build inflation beating wealth for your future and recurring income for today.

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And now your host, former J.

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P.

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Morgan investment manager, Manish Kataria.

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I'll talk about how I look at my portfolio and really the strategy I

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use to, to run my income portfolio and my set and forget portfolio too.

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The great thing about creating smarter portfolios, in the way

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I see them is two things really.

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One is that they are much simpler to manage.

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They're a lot more passive.

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secondly, they tend to provide much better returns over the longterm.

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And actually a third one is also that actually limits your downside

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losses in the event of a downturn.

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Okay, so, let me show you how that works.

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Central to any options strategy is the concept of delta.

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No serious options investor would ever consider, investing with options

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without, Taking account of Delta.

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Now Delta is a relatively simple approach, simple concept, but it makes

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the world of difference in terms of risk management, in terms of continuous

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income creation using, options.

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So let me show you how that works.

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So you might have been, using something called Keltner channels or

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Keltner bands, to provide signals.

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For when you should enter or exit trades, when you should enter into

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an options trade, for example.

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So here's just a quick example using Keltner Bands for the S& P 500 Index.

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Okay, and this is a chart for 2024.

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Now, you can see the blue line is the S& P 500 index, and you can see the upper

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and lower Keltner, channels, right?

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So the first thing to mention here is, as you can see, it very

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rarely hits the lower band, right?

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I can only see one here.

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and one here.

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So it's only been twice in the space of almost one year.

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That is, it has hit the lower band, which is, seen by many people

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as a signal to enter the trade.

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Now, that's one thing.

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So if you're relying on this signal to provide opportunities to enter

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the trade, well, you've missed out on quite significant gains because

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your money would have been sitting on the sidelines doing nothing.

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The second thing is, it provides a lot of false signals.

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That's the other thing to observe from this.

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So you see how many times it has hit the upper channel.

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and historically that has been, for some people, a signal to sell short.

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your position or to sell calls on your position.

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And that would have actually ended up losing money because, despite

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the fact that it's hit the upper channel, it has continued to go

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up throughout this period of time.

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Okay.

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So for me, it's not something I use.

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It's not something I have seen, other professional investors use.

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far better and with more risk management and with higher

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returns is a concept called delta.

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Just to recap using keltner channels in this way Most of the time your

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money's sitting there on the sidelines because the signals are just not

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there when you use delta https: otter.

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ai

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So here, let me just show you what, Delta looks like from an options platform.

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So here's interactive brokers, and Delta's pretty easy to find on an

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options chain for any underlying stock.

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So there is, that's your Delta.

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think of Delta like a probability probability of, the stock price

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hitting your strike price, or the probability of being assigned, or in

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other words, a probability of profit.

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Okay, so you can see here you selected delta and it provides you on this

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platform, an indication of what the probability of profit would be.

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Okay, so that's a very handy, signal, an indicator to have.

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And also, actually, you should be mindful of all the Greeks, in particular delta.

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Gamma to an extent, and also theta, okay?

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But delta is by far the most important one, especially when you

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are trading options for income, okay?

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So please don't, consider, investing in options without

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even understanding what delta is.

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Once you get to know it, it's a pretty simple concept,

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but a very powerful concept.

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concept to be aware of.

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Okay, so going back to our chart.

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So instead of having your money waiting on the sidelines, as it would

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have done, Delta gives you the strike prices, the safe strike prices to

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be putting on your options trades.

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So every month you can see there were opportunities.

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This is what, myself and my investors were doing.

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We were earning income continuously because we were using Delta.

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Below the current market value, the current price, these were the strike

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prices which were below, providing a margin of safety for investors, okay?

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So you can see there were continuous opportunities, so instead of earning

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income twice in a year, we were earning income, all throughout the year.

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So this is on the S& P 500 index.

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to create a diversified options portfolio, which you should do if

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you're doing options in a serious way, don't just look at a handful

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of commodity stocks or metals.

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you want to have sector ETFs.

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We look at these all the time.

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We want quality blue chip stocks, which we'll talk about in a minute.

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How do you identify them?

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dividend stocks, high dividend paying stocks.

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yes, gold, silver, oil commodities.

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This should be part of your mix, not the entire portfolio.

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And crypto, we have opportunities to invest in crypto related ETFs and stocks.

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and then different strategies.

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So those are the underlyings.

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Different strategies.

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Leaps.

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These are long term, securities which enable you to, gain control of your chosen

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underlyings at a fraction of the price.

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very powerful strategy.

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Strangles.

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Strangles enable you to, create double your income by

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selling both calls and puts.

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At the same time, okay?

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Simultaneously.

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And, credit spreads are another very powerful strategy.

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they do two things.

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One is they give you a higher, much higher ROI.

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And secondly, they provide you some downside protection, a

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downside, built in downside hedge, okay, to your options positions.

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So, it's a very powerful strategy there as well.

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and we can deploy all of this using margin, which, moderate margin,

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which multiplies your income.

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Now, you'll all be familiar with the options wheel strategy.

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Many of you will be.

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This is my core strategy and, everything we've mentioned so far using margin

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and using all of those different underlyings, using delta, that can all

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be applied to, what's actually quite a vanilla options wheel strategy.

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So instead of earning the sort of regular 1 3 percent per month, if you employ

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all of these enhancements, you can be creating, multiples of that one to 3

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percent per month when done properly.

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Okay.

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So just to remind you of the wheel strategy, it looks like this.

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You acquire a blue chip stock.

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And you rent it out and which is covered calls.

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You receive income for that.

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Then your shares might get called away, but you get capital gains for doing that.

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And then you go back and seek to acquire more blue chip stocks.

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You buy selling a put option, okay, then your shares might get assigned

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and then you rinse and repeat.

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You earn income continuously throughout this wheel, at enhanced

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levels of income and with built in risk management by using delta.

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And using, other sort of hedges as part of credit spreads, for example.

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So very effective and powerful strategy with the different sort of bolt ons

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that you would, add on to your regular sort of vanilla, Options wheel strategy.

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There are so many opportunities to enhance your income.

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Think about it in terms of properties.

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When you buy a property, think about all the ways in which you can

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optimize and enhance your income.

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Okay.

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So options work in the same way.

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So, you can get much higher income using margin.

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Okay.

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so, think about, the property analogies, other people's money.

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Getting a mortgage, right?

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Margin and that enables you to, create higher income by borrowing

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moderately, using, capital that has been provided to you by the platform.

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Okay, so, so that's using margin that magnifies your returns.

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Yeah, Advanced strategies.

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So we've talked a little bit about strangles and credit spreads.

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Think about that as creating a multi let.

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Multi let out of a single let in terms of the property analogy.

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So with options you can do the same thing by applying all of these advanced

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strategies to multiply your income levels.

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And, and think about, more active asset management.

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So again, you own a property.

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Property portfolio, commercial property portfolio.

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if you are active in

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terms of

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actively managing your assets, asset management, you can

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do the same with options.

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So instead of letting things expire, you might roll them, in a strategic way,

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early

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before expiry.

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So

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that again

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enhances your.

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business.

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Levels of income.

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Okay.

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So, and there are so many of these strategies to enhance your income.

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I've created a whole load of, risk management rules, which

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allow you to enhance your income with downside protection.

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And the great thing is none of these have ever resulted in any permanent

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loss for me or for my investors.

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Because, we deploy these with, strict, controls, which are actually

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pretty simple to, to manage.

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so, there are a whole load of these risk management rules, which

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can, you can get from, the step by step options guide at options.

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investlikeapro.

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co.

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uk.

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Or you can scan this QR code and you'll get a copy of that, options guide.

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