Options are not a set and forget trading tool. Managing an options portfolio requires frequent monitoring and intervention when the data requires it. But what metrics should be monitored? And when or how? Once an options portfolio contains more than a few positions, keeping track can be a challenge without knowing how to look at both the big picture and individual strategic positions.
How often to monitor an options portfolio?
Determining how often to monitor an option portfolio is something of a personal choice, based on how active a trader wants to be, but some guidelines might be helpful. The biggest driver in deciding how often to monitor the status of an options portfolio is the duration of the options in the portfolio. The closer the options are to expiration, the more attention they need.
I know traders that trade expiration day options every day- options that will expire at the end of the current trading day. That requires attention not only every day, but potentially constant attention. Some expiration day traders, or 0 DTE traders as they are often called, open their trades each morning and enter conditional limit and stop orders to close and then go about their day. Others prefer to watch their positions and manage them based on what the market does, adding more positions or closing when certain criteria are met.
I personally haven’t had long term success with 0 DTE trades, so the shortest duration I like to use is around 7 DTE. For these, I need to check them at least once a day to determine if I want to make adjustments or rolls.
An exception to the need to manage an option about to expire is options that are deep in the money, or way out of the money near expiration, and the plan is to simply let them settle with an assignment or expire worthless. If that’s the plan, no need to monitor.
On the other extreme are traders that trade in LEAPS options, options that are a year or more from expiration. These options move very gradually in value, so a trader may be able to go several weeks or even a month or more without checking on their status.
Perhaps a trader has an options portfolio primarily of 30 -60 DTE options. Probably checking once or twice a week would be sufficient.
So, duration determines how often positions need to be monitored, and traders get to choose duration by choosing the options they buy or sell, and deciding whether they want to hold all the way to expiration. For traders that have a full-time job doing something else, trading short duration options will likely be hard to find time for, but longer duration options can be managed with occasional monitoring. Traders that utilize 0 DTE trades with a strategy to frequently intervene, likely need to be available full time during market hours.
A second factor in determining how often to monitor an options portfolio is the number of positions in the portfolio. A trader with a few positions can take a quick look and know what the impact of market changes will be, while a trader with dozens or hundreds of positions needs to do thorough reviews more often.
A third factor is the types of strategies used is also a factor in determining how often to monitor an options portfolio. If all the positions are covered calls and cash secured puts, there is less need to monitor than if a trader is trading lots of options at the money that may swing wildly with small movements in the market.
Finally, the ways that a trader manages individual positions will determine how often monitoring is required. If a trader uses limit orders and stops to determine when to exit each position, there isn’t as much need to monitor- the trades will close when the criteria is met. Traders can also strategically use alerts to let them know when it might be time to make a change or know when a conditional trade has executed. Other traders prefer to make decision based on the data available as time progresses and monitor their positions more frequently.
There’s no formula for how often to monitor an options portfolio, only variables that increase or decrease the frequency required for monitoring.
What to monitor in an options portfolio?
While an options portfolio is made up of individual positions, and ultimately the portfolio is managed by adjusting individual positions, taking a step back and looking at the options portfolio as a whole allows a trader to be more strategic and manage overall risk and expected returns. So, before diving into individual positions, let’s consider the metrics that bear attention.
Profit and Loss
The whole goal of trading is to make a profit, so it stands to reason that a trader has to pay attention to the profit and loss of the overall portfolio. A trader can’t directly impact profit and loss- the market determines whether the total of all traders are profitable or not. The trader opens positions that they expect to be profitable and manages the positions as the market changes over time. However, profit and loss is the ultimate scoreboard to determine whether the options portfolio is winning or losing, so that’s the place to start.
It’s kind of like managing a sports team. The manager and general manager determine the players available and decide whom to play in different situations. There are lots of ways to measure the effectiveness of each player and the team statistically, but in the end, fans only care about wins and losses. Sometimes a very good team plays a much less talented team but gets beaten. A manager has to look at each game and each season to evaluate what is working and what isn’t- what happened the way that was expected and what was not expected? What management moves worked and what moves might have made a difference in the outcome?
The same is true with trading. A trader opens trades that are expected to profit and perform a certain way. We have a number of metrics to measure those expectations, but when the options portfolio doesn’t match expectations, I’m going to have to dig a little deeper to figure out which players aren’t performing. What I mean in market terms is that based on market direction, I have a pretty good idea of what my options portfolio should do, but I check my profit to see how my portfolio is actually performing.
As a trader, managing an options portfolio, a number of metrics can tell us how our portfolio is poised to perform. By managing these metrics, a trader can drive how much the market will impact profits and in which way. Not always, which is why I first check profit and loss, but most of the time, the metrics tell me what to expect.
Portfolio Delta
Likely the most helpful metric in understanding the performance of an options portfolio is to measure the Portfolio Delta. First, we have to understand what Portfolio Delta is. For traders not familiar with the options Greek Delta, check out the page on Delta. For an individual option contract, Delta measures the amount that option premium will change in value for every dollar change in the price of the underlying security. Delta also is a measure of probability of an option expiring in the money. But when we add all the Delta values together, we get a number that shows how much an options portfolio will change in value in the market.
Remember when calculating that Delta can be positive or negative. Long calls and short puts have positive Delta, and long puts and short calls have negative Delta. Shares of stock have a Delta of 1 per share, and shares of short stock have a Delta of -1 per share.
The starting point is to realize that if we multiply the Delta of a single option contract by the 100 shares that the contract controls, we will have an equivalent number of shares that our option is equal to at any given moment. So an options contract of +0.30 Delta is equivalent to owning 30 shares of the underlying stock, and a contract with a -0.20 delta is equivalent to being short 20 shares. If we had both contracts in our portfolio and they are the same underlying, the net position would be equivalent to owning 10 shares of the underlying.
But options portfolios often have different underlyings at different prices, which react differently to the overall market, so the math doesn’t just add up that easy. So, what to do? A problem with Portfolio Delta is that different trading platforms show this in different ways or maybe don’t show it at all.
One approach is take all securities and beta-weight them to SPY, the leading market ETF for the S&P 500 index. Beta is a measure of correlation. By looking at the beta value of each underlying security, we can estimate how much each underlying will change in value for a given change in the SPY ETF. Then we can take the Delta values of the option contracts for each underlying and multiply it by the beta values to get a weighted total. The end result is a value that equates to an equivalent number of shares of SPY. A few brokers calculate this value automatically and if so, it’s a great value to have available. But still, context is needed. Let’s say my options portfolio has a SPY beta-weighted Delta of 100. Is that a lot, or not? Well, 100 means that I have the options equivalent of 100 shares of SPY. Let’s say SPY is trading at $400/share. So, my options portfolio will behave like $40,000 of SPY. If the total value or net liquidation value of my account is $10,000, that means my account values will swing approximately four times as much as the market. On the other hand, if my account has a total value of $400,000, then my account will move up and down one tenth as much as the market based on price movement. So, I could be very sensitive to market price movement or not sensitive at all- it depends on my Portfolio Delta compared to the value of my total account.
What if a broker doesn’t offer beta-weighted Delta, or any form of portfolio Delta? Well, this is where we have to get creative. I have a broker that doesn’t provide any Delta information other than the Delta of each contract in my portfolio. So, what I do is export my positions, including Delta values into a spreadsheet and calculate a price-weighted delta. If we multiply option Delta by 100 times the price of the underlying security, we get an equivalent value of stock. For example, if I own an option with a 0.25 Delta value on an underlying security with a price of $200 per share, I own the equivalent of $5,000 of that stock (0.25 Delta x 100 shares x $200/share). If I add all the equivalent values together, I’ll know what the stock equivalent value of all my positions is. This approach doesn’t take into account how correlated my underlyings are, but I still get a ball-park idea of how much market exposure I have. Again, I can compare this amount to the total value of my account and see how much the market will move my value. So, if the stock equivalent value is $40,000, I compare to the total value, just like in the previous example.
No matter how a trader chooses to calculate Portfolio Delta, the key is to convert the value to compare to the overall account value to see how leveraged the option portfolio is. I like to take it even a step farther and think of my Portfolio Delta equivalent share value as a percentage of my overall portfolio value. So, if I convert my Portfolio Delta to an equivalent share value of $40,000, and my overall options account has a current value of $100,000, my options are the equivalent of being 40% in stock. The percentage may be positive or negative, and may be well over 100%, or more negative than -100%. The concept is that we get a measure of how our options portfolio compares in price movement to being solely invested in stock.
What is a good value for the percentage of Portfolio Delta equivalent shares to the overall portfolio? Well, it depends on the objectives of your account. Some people use options to hedge stocks and reduce volatility of the account value, so keeping the percentage below 50% may be their objective. Others may be trading with a goal to have a totally neutral outlook, so they try to keep the value as close to 0% as possible, or just slightly negative, perhaps between 0 and -10%. Someone who has a bearish outlook may want a more negative value. On the other hand, someone who is extremely bullish and wants to use options as leverage may have a percentage of well over 100%, or even over 200%.
Let’s say I decide I want to use options to try to collect premium and also keep the volatility of my account less than the market while being generally bullish. I may target to have my Portfolio Delta be the stock equivalent of 75% of my account value. Since the Delta values will move up and down with the market, I might decide that as long as my Portfolio Delta stock equivalent percentage stays between 50% and 100%, I’ll be happy. If my options portfolio gets outside that range, I will look to open and/or close positions to move my Portfolio Delta back in line.
The whole point is that Portfolio Delta needs to match up with what a trader is trying to achieve strategically. More than any other metric, Portfolio Delta determines how much an account will change in value as the market goes up and down. It also will help a trader know what to expect on any given day based on what the market is doing. If my Portfolio Delta share equivalent percentage is -50% and the market drops 2% in a day, I would expect my account to go up 1% that day just based on underlying price movement.
By managing Portfolio Delta, a trader can manage expectations of volatility of the options portfolio account value. The closer Delta is to zero, the less volatile the portfolio value will be. A trader can manage this by choosing what positions to carry in an account. Volatility can be good and it can be bad. If big moves are increasing the value of the account more than they decrease it, volatility is good, but when big moves decrease the value of an account, volatility is bad. In most accounts, more volatility means more risk, but also more potential reward. The key is to find a balance that a trader is comfortable with.
Portfolio Delta will change as the market goes up or down. If an options portfolio primarily has short options, Delta will change in the opposite direction of price movement. On the other hand, if the options portfolio is primarily long, the Portfolio Delta will move the same direction as price. As an option trader who tends to trade more short options, my Portfolio Delta goes down when the market goes up and it goes up when the market goes down. This phenomenon actually works as a bit of a built in contrarian approach and could even be thought of as a “buy low, sell high” approach. My account gets more bullish with higher delta when the market goes down and more bearish with lower delta when the market goes up. As the market goes up and down, my Portfolio Delta bounces around with it- I just watch my Portfolio Delta to adjust if it gets too high or too low.
The option Greek Gamma is a measure of this change in Delta which is written about on the Gamma web page, but I don’t think it is critical to know how much Gamma is in the account. Portfolio Gamma can be calculated, but there are other ways to get a grasp on the volatility of Delta which we’ll discuss shortly.
Portfolio Theta
Theta is the measure of decay in options premium and is discussed in more detail on the Theta web page. Remember that option buyers are fighting against decay and have negative Theta. Option sellers benefit from decay and have positive Theta.
Calculating Portfolio Theta is much easier than Portfolio Delta. Theta is a defined dollar value per contract on a per share basis and can simply be added up. It doesn’t matter if the underlyings in an options portfolio are the same or different. The Theta dollar values just add up.
For example, let’s say I have one option contract in a low price stock where the Theta value is 0.02, and I have two contracts in another higher priced underlying with a Theta value of 1.20. To get the Portfolio Theta of these two positions, the math is (1 contract x 100 shares/contract x $0.02 Theta) + (2 contracts x 100 shares/contract x $1.20 Theta) = ($2.00 + $240.00) = $242. Most trading platforms will do this math automatically and show a total somewhere.
How can a trader decide what a good Theta value is? Again, Portfolio Theta must be put into context by comparing to the value of the options portfolio. I prefer to look at Portfolio Theta as a percentage of the portfolio.
As primarily an options seller, one would think that the more Theta, the better. To a degree, that’s true. I want lots of decay, because decay is profit. However, if Theta gets too high, it can mean that there are too many positions or positions with too much volatility. As expiration approaches, positions with lots of Theta have strike prices close to the current price, so the position could easily move to total profit to total loss in a short period of time. In this way, Theta is a measure of risk. So, for most short option positions, I prefer to have Portfolio Theta value be between 0.2% and 0.4% of the total options portfolio. Less than 0.2% means I’m not collecting enough Theta, and over 0.4% means I’m taking too much risk. Going back to the reference to Gamma, high Theta ties to high Gamma, so if Theta is too high, Gamma will also be too high making Delta too volatile, jumping with small moves in underlying price.
For option buyers, Theta is a value to minimize. An option owner wants price to move in one direction and doesn’t want time value to decay very much. So, although I don’t buy options outright much, when I do, I try to keep Portfolio Theta between 0 and -0.1%, so that negative Theta doesn’t each much of the option premium.
For those trading spreads, realize that spreads are either credit/short positions or debit/long positions. Think of a credit spread as essentially an option sale, and a debit spread as an option buy. The same Portfolio Theta percentages generally apply for options portfolios made of spreads as those with naked positions.
For traders doing a combination of selling/credit option strategies and buying/debit strategies, an assessment of how much of each is in the account to determine if the amount of Theta is reasonable. The key is to evaluate Portfolio Theta regularly to assess decay and risk.
Buying Power
Every broker has some calculation of how much capital is tied up by your positions. Some brokers call this buying power, others may call it cash available to trade, or some similar name. Depending on the types of option trades being made, and the margin requirements for the strategies used, buying power is unique to each strategy and category of underlying. See the web page on Margin and the page on Option Risk Levels for more information. The strategies a trader uses may keep buying power used constant, or may vary with margin as prices vary.
Again, looking at buying power available is best looked at as a percentage of the options portfolio account value. But what is the right value? Like the other values, it depends on a number of factors.
First, buying power usage is a matter of trader preference for risk. Some traders are more aggressive and are willing to take more risk. Other traders are more concerned with preserving capital in all situations, even if it keeps profits relatively low. The key is for traders to understand the risks and benefits of the strategies being used along with the market condition to determine how aggressive they are willing to be. In the end, a trader needs to be able to sleep at night, comfortable with the level of risk being taken. Early on, traders should be very cautious, and only increase percentages with experience in good and bad times. Bad times help alert a trader to the potential for disaster, and the need to avoid trading too much of an account’s buying power at any point in time.
The types of strategies used impact how much capital needs to be kept available. Lower risk strategies can use more capital than high risk. Covered options have much less of total loss of the covered position than naked options sold on margin. Long options and option spreads are in between. An aggressive trader may use 90% of an account with covered options, but not more than 50% for naked short positions on margin. Why? Positions sold on margin can have their margin requirements increase significantly when the market goes against the position, while covered options have risk defined, preventing changes in buying power required.
The market environment also impacts the amount of capital that is wise to risk. Ironically, when the market seems the most calm, it is actually the most risky for option sellers in particular and vice versa. When the market is calm and Implied Volatility is low, there isn’t as much premium to sell, and sellers have to sell at strikes closer to the current price to make money. If an upset happens, Implied Volatility will jump and make existing positions more expensive, a loss for sellers. On the other hand, when Implied Volatility is high and things look bad, options sell for high premium and even bad news generally won’t make underlyings move more than the Expected Move. So, wise traders will reduce buying power usage when markets are calm or move to lower risk strategies. To paraphrase Warren Buffett, we want to be fearful when others are greedy, and greedy when others are fearful. What’s high and low Implied Volatility? A good place to start is to use IV Rank or IV Percentile, which puts Implied Volatility in context with its values over the past year on a scale of 0 to 100.
Adjusting an options portfolio
After reviewing the key option metrics of the account, it should be clear how the account is positioned compared to how the owner would like it to be. If the metrics are all where we want, there isn’t a need to make any changes. But, if the metrics have drifted away from the preferred ranges, it is time to look for ways to adjust. Generally, we can adjust by adding positions, removing positions, rolling positions, or substituting positions.
Remember that the first thing we looked at was the profit and loss of the account. After looking at the other metrics, our profit and loss results since we last reviewed the account should make sense. If the market has moved a significant amount, our profit or loss should be proportionate to our Portfolio Delta. If the market has not moved or Portfolio Delta is mostly neutral, Theta may be the dominant driver of profit or loss. Is this what has happened? Most likely, yes. But, if not, we should look to see if one or more positions in the account is driving results differently than what our metrics would predict. Was there surprising news that impacted a position differently than the rest of the market? Maybe one position moves in the opposite position as the market and that negative correlation isn’t accounted for in the Portfolio Delta calculation. In any case, the goal is to figure out if this difference in profit and loss performance is a one-time occurrence, or something likely to continue. This may change our assessment of what the metrics are suggesting about what we expect in future performance from our current options portfolio.
If the metrics suggest that adjustment is needed, how do we decide whether to close, add, or roll? One place to start would be our buying power available. If there is too little capital available to trade, it is time to close some positions to free up capital. Look for positions that are moving the metrics in the wrong direction compared to the target levels. Is there a combination that will reduce buying power usage and get the Delta and Theta values in the preferred range?
If there is a lot of buying power available, we can add positions, and look for specific strategies that move Delta and Theta toward target levels. Selling puts or put spreads will increase our Delta and Theta. Selling an Iron Condor with equal width wings will reduce Delta and increase Theta. Buying options will reduce Theta.
Rolling can change metrics without significantly changing buying power used. For example, rolling out positions to later expirations will bring Delta and Theta toward zero and generally make the account less volatile in the short run. Rolling strikes up or down can tweak Delta and Theta as well.
Over time, watching the key metrics of an options portfolio allows traders to manage results by controlling the level of risk being taken. Each trader has a different tolerance for risk but understanding risk measures at a glance is a skill all option traders need to be familiar with.
