Option Strategies To Manage Risk and Improve Returns

Options trading has surged in popularity recently due to factors such as easier access through online platforms, abundant educational resources, and the influence of social media. Personally, I’ve been trading options for over three years, using them to manage risk, and generate income.

One of the challenges I faced is the complexity of options trading compared to traditional stock trading. Unlike stocks, where you “only” decide what to buy or sell and when, options trading involves several additional parameters: choosing between puts or calls, determining the strike price, and selecting an expiry date, among others. The number of decisions to make can be overwhelming.

To streamline decision-making, I developed five strategies that help shortlist potential trades based on customizable settings, making it easier for traders to identify opportunities.

1) NewShortCall Strategy – Initiating Covered Calls

This strategy aims to open new covered call positions:

• Select stocks with at least 100 shares and no existing covered calls.
• Focus on options with expiration dates between a “Min DTE” (default: 15) and “Max DTE” (default: 60).
• Ensure a “Min Open Interest” (default: 10).
• Prioritize options with a probability of profit (POP) greater than “Min POP” (default: 0.7) based on delta 
• Prioritize options with a probability of profit (POP) greater than  “Min POP” (default: 0.7) based on historical performance over the last five years.
• Finally, select options with the highest ROC/Day.

2) NewShortPut Strategy – Initiating Short Puts

This strategy focuses on selling puts:

• Select strike prices ≤ “Short Put Amount”/100 (default: $50,000).
• Focus on options with expiration dates between “Min DTE” (default: 15) and “Max DTE” (default: 60).
• Ensure a “Min Open Interest” (default: 10).
• Prioritize options with a probability of profit (POP) greater than “Min POP” (default: 0.7) based on delta 
• Prioritize options with a probability of profit (POP) greater than  “Min POP” (default: 0.7) based on historical performance over the last five years.
• Finally, select options with the highest ROC/Day.

3) RollShortCall Strategy – Rolling Covered Calls

This strategy rolls covered calls to a new strike/expiration:

• Roll when delta exceeds “Roll Delta” (default: 0.8) or if a higher ROC/Day option exists.
• Roll to expirations between “Min DTE” (default: 15) and “Max DTE” (default: 90).
• Ensure a “Min Open Interest” (default: 10).
• Roll to options with delta between “Min Delta” (default = 0.3) and “Max Delta” (default = 0.7) 
• Finally, select options with the highest ROC/Day.

4) RollShortPut Strategy – Rolling Short Puts

This strategy mirrors the approach for short calls but is applied to short puts:

• Roll when delta exceeds “Roll Delta” (default: 0.8) or if a higher ROC/Day option exists.
• Roll to expirations between “Min DTE” (default: 15) and “Max DTE” (default: 90).
• Ensure a “Min Open Interest” (default: 10).
• Roll to options with delta between “Min Delta” (default = 0.3) and “Max Delta” (default = 0.7) 
• Finally, select options with the highest ROC/Day.

5) CloseWinningShort Strategy – Locking in Profits

This strategy aims to close profitable positions early:

• Close positions when current P&L exceeds a set “Min Profit” (default: $100) 
• And when the expected loss outweighs the potential gain.

Key Insights/Motivations for the strategies above:

• For NewShortCall: Selling covered calls generates premiums, but limits upside potential. Rolling early when delta crosses a certain threshold lets you raise the strike price, capturing more potential upside.
• For NewShortPut: Selling puts allows premium collection, but exposes you to buying the stock at a higher price if it falls. Rolling early helps lower this risk.
• For Roll Strategies: Rolling is beneficial when delta becomes too high, as a delta closer to 1 reduces time decay—your primary source of earnings in short options. Rolling also helps avoid assignment or exercise of the option.
• For CloseWinningShort: Studies from platforms like TastyLive, TradeOptionsWithMe and OptionAlpha show that closing winning positions early increases win rates and long-term profitability.

These strategies offer a solid foundation for options trading, but I am more than happy to learn more. If you have other ideas or strategies that you highly recommend, please share and we can incorporate them.

These strategies offer a foundation for options trading. I am more than happy to refine the above strategies or explore new ones that might optimize returns or manage risk better. If you have any additional ideas or strategies that have worked for you or recommend, do share them!

Happy investing!