An options strategy is best incorporated into Nitrogen by creating a custom investment. An advisor just needs an idea of the expected 6 month return and volatility of the strategy to create the investment. Type the name of the investment and click on it to display the Risk/Return Scenario.
Nitrogen has been designed to empower advisors to include any and all investment vehicles in their arsenal. Options can be incorporated in a myriad of ways.
In practice, the most efficient ways to include an options strategy into Nitrogen is with the Custom Investment feature or overriding the risk analytics by clicking on the investment to open the risk/return scenario.
Every options strategy is wildly different from the next. However, an advisor simply needs to boil the strategy down to the expected 6 month return and volatility of the strategy. When incorporating an options strategy into Nitrogen, the advisor must ask themself "what is the likely return of this strategy over the next 6 months and how volatile do I expect it to be?"
Here are a couple of examples using the Custom Investment feature:
SPY based Options Strategy
Let's assume you set aside a portion of a client's portfolio for trading options and want it incorporated into the Nitrogen analytics.
- Click the ADD INVESTMENT field, enter the name of your options strategy (one that is identifiable to you and will look good on a client-facing document), and press Enter when prompted to create a custom investment.
- Next, you will want to enter the expected 6 month RETURN and VOLATILITY percentages - The foundation for the return and volatility numbers you select could be based on your track record in the past and/or your outlook for the strategy given the VIX, options prices/cost, etc. It may help to use the standard deviation of the S & P 500 as a comparison benchmark for your strategy.
- For example, if the standard deviation of the S & P 500 is 17 and you deem your options strategy to have 50% less volatility then you would use 8.5 for the volatility number in Nitrogen.
Here's an example of what a SPY based Options Strategy may look like:
Complex Options Strategy
Most options traders have access to and focus on a strategy's max drawdown and expected return. Nitrogen makes it easy to incorporate those readily available data points into the Custom Investment field. Let's incorporate Portfolio Armor's risk statistics into the custom investment feature.
Conveniently, Portfolio Armor presents risk and return analytics for the next 6 months. Here an advisor could enter the 8.46% into the expected return field and then adjust the volatility number (to 14 in this case) to have Nitrogen calculate the best/worst case data.
Depending on the integration partner and identifiers assigned to your options you may need to create a custom investment for this option the first time you import or integrate. Simply type the name and tell Nitrogen about the investment. Later you can update the underlying data by clicking on the investment to open the Risk/Return Scenario.
In summary, an options strategy is best incorporated into Nitrogen by creating a custom investment. An advisor just needs an idea of the expected 6 month return and volatility of the strategy and you're off to the races!