Smart Portfolio Management II

In Part 1, we explored smart portfolio management for a $10K portfolio. This week, we turn our attention to a $200K portfolio, where a more diversified, hedged approach can be employed. Next week, we will look at strategies for managing a $1M portfolio.

Balancing Stocks and Options

Managing a $200K portfolio requires a blend of stocks and options. Unlike small portfolios, this size allows for greater diversification while still maintaining flexibility.

While stocks provide long-term stability, options allow for enhanced returns and strategic hedging. This combination helps protect against market fluctuations and reduces risk while maintaining upside potential.

Step 1: Setting Realistic Goals

A 20% annual return is a reasonable and achievable target. While some traders aim for much higher gains, trying to force trades for quick returns often leads to poor decision-making and unnecessary risk.

Over 20 years, a 20% compounded annual return on a $200K portfolio would grow to over $7.5 million.

Rather than chasing unrealistic gains, the focus should be on consistent, well-managed trades that allow for compounding growth over time.

Strategy A: Covered Calls with LEAPS for Stability

One of the most effective low-risk strategies for a $200K portfolio is the covered call using LEAPS (Long-Term Equity Anticipation Securities).

Example: Conservative Covered Call Trade

• Stock: XYZ trades at $90 per share.
• Buy 500 shares at $90.
• Sell January 2026 $90 calls for $15.00.
• Net Cost Basis: $75.00 per share.
• Maximum Profit: $15.00 per share (20% return).

If XYZ remains above $90, the trade achieves a 20% return in one year. If XYZ declines, the lower cost basis provides downside protection.

By diversifying into 7-10 stocks with similar setups, the portfolio remains well-balanced while generating consistent income.

Strategy B: Short-Term Covered Calls for Enhanced Returns

While LEAPS covered calls provide stability, short-term covered calls can increase returns.

Example: Short-Term Covered Call on ABC

• Stock: ABC trades at $120.
• Buy 500 shares at $120.
• Sell March $125 calls for $5.00.
• Net Cost Basis: $115.00.
• If ABC stays above $125, the trade returns $10.00 per share (8.7%) in 60 days.

Repeating this strategy every two months can significantly increase annualized returns, often exceeding 30% per year.

Strategy C: Cash-Secured Puts for Passive Income

Selling cash-secured puts allows traders to generate income while entering stocks at a discount.

Example: Selling Puts on DEF

• DEF trades at $55.
• Sell March $50 puts for $2.00.
• Potential Outcomes:
  • If DEF stays above $50, the trader keeps the $2.00 premium.
  • If DEF drops below $50, the trader buys at an effective cost of $48.00.

This strategy works best on stocks you are willing to own long-term.

Strategy D: LEAPS for Long-Term Growth

Instead of buying stocks outright, a portion of the portfolio can be allocated to LEAPS calls, allowing control of high-quality stocks with less capital.

Example: LEAPS on GHI

• Stock: GHI trades at $150.
• Buy January 2026 $140 calls for $20.00.
• Instead of spending $15,000 on 100 shares, the trader controls 100 shares for just $2,000.

If GHI rallies to $180, the option appreciates significantly, yielding outsized returns compared to stock ownership.

Strategy E: Hedged Calendar Spreads

For lower-risk, income-generating strategies, calendar spreads provide an excellent balance between income and flexibility.

Example: Calendar Spread on JKL

• Buy June $100 calls for $6.00.
• Sell March $100 calls for $3.00.
• Net Cost: $3.00 per contract.
• If JKL remains near $100, the March calls expire worthless, and another short call can be sold in April.

This strategy takes advantage of time decay and works best in sideways markets.

Final Portfolio Allocation for a $200K Portfolio

A well-diversified portfolio spreads risk while maintaining high return potential. Adjusting allocations based on market conditions allows for greater flexibility and long-term success.

Key Takeaways

Diversify Across Stocks and Options – Avoid over-concentrating in any single asset. Focus on Consistent Returns – Aiming for 20% annually can compound wealth significantly. Utilize Covered Calls and Cash-Secured Puts – Generate steady income while managing risk. Deploy LEAPS for Growth – Control stocks with less capital, maximizing efficiency. Hedge Using Calendar Spreads – Reduce exposure while profiting from time decay.

A $200K portfolio allows for more flexibility and strategic allocation than a smaller account. By balancing stock ownership, options income, and hedged strategies, traders can achieve steady, compounding returns with minimized risk.

Next week, we will explore how to manage a $1M portfolio with advanced strategies and risk-adjusted allocations.

Trade wisely,

— Phil