Goals and Guidelines

In January of 2021 the RiverTree project started with a balance of $50,000 USD.  RiverTree’s goal was to trade stock options for income.  This article outlines guidelines developed for the Rivertree portfolio.

RiverTree’s Trading Goals

The overriding goal of the RiverTree project is to consistently generate income while limiting risk and maintaining flexibility for reallocating funds.  To achieve the project goals, a set of guidelines has been developed for position management and trading activities

Options Trading for Income

Income options trading is a relatively uncomplicated trading strategy with the potential to routinely earn modest profits.  Options income trading frequently focuses on selling put or call options contracts for a premium.  The basic steps include selling (shorting) a contract, receiving a payment, waiting for contract expiration, and then repeating the process.  As one might expect, actual trading and portfolio management are a little more complicated.

Covered calls and cash-secured puts are two types of trades frequently used in options income strategies.  These trades limit overall risk and are often considered to be fairly conservative.  The sale of a call is typically backed or covered by shares of stock (covered call) and the sale of a put is covered with cash (cash-secured put).  The duration of the contract is limited, the strike price is fixed and the option contract can be repurchased if necessary.  Trading the options contracts makes it possible to manage risk and loss in a number of ways.  However, these strategies are not without risk, and individuals unfamiliar with these trades should seek additional information.

Trading and Position Management

Income trading is an ongoing cycle of portfolio management and trading decisions.  In contrast, to “buy and hold” investment strategies, income investing is an active process involving routine monitoring and position adjustment.  Typically this includes assessing market conditions, reviewing existing positions, and making portfolio adjustments or trades.

The sale of options contracts generates income, however, holding a short options position until expiration also creates potential risk.  Unexpected market events can quickly turn a profitable trade into a loss.  Fortunately, options strategies make it possible to respond to market events and adjust positions in order to reduce or avoid losses.  Rivertree’s guidelines are intended to help structure income trading processes and improve performance outcomes in a variety of market conditions.

RiverTree Guidelines

Rivertree’s guidelines are intended to make decisions more routine, objective, and measurable as well as profitable.  Guidelines also consider trade selection, trade size, and time until expiration.  The guidelines are also a working document that will be periodically revised and supplemented with articles and spreadsheets.

Portfolio Management and Trading Guidelines

  1. General Guidelines
    1. Focus on US Economic Sector ETFs.
    2. Monitor economic activity and potential market events.
    3. Trades and portfolio adjustments are small and routine.
    4. No naked puts or calls (funds are reserved to secure puts).
    5. The overall portfolio Delta is near zero to slightly positive.
  2. Volatility
    1. Review IV rank and Delta for potential trades.
    2. Balance options premium with the likelihood of being ITM.
  3. Time - Until expiration
    1. Limit expiration dates to between 30 and 60 days.
    2. Overall Theta values are moderate.