Laying The Groundwork

You want a strategy that is mathematically correct. If you have numbers, you can use them, but you want to modify them. If you plan to take a stock trading strategy and convert it to an option strategy, you certainly can. Simply calculate the would be return for several possible outcomes and plug the numbers in the spreadsheet. The spreadsheet is the bulk of the work, but once you have it, it will work for you.

So you come up with a strategy of how many trades at a time maximizes your return. You then see the total capital at risk.

The key is to see the cash on the side and make sure you find some way to tie up MORE than that. Particularly as it relates to any asset with "risk". I have used conservative numbers I feel when running this strategy, but I will till plan on using generally around half the percentage. I have verified that doing so is correct, and actually 10-11 assets in the portfolio really maximizes it, however I wanted to reduce the position size to account for the volatility that will increase the fees when my position size is lower, while also providing a more stable strategy.

I create a "lower risk" fund. This includes. short term yield ETF,Currency ETFs (and LEAP options in them), Bond ETFS,Preferred shares ETF,Commodity ETF,Stock ETF,Stock Trades, excess Cash. To a minimal extent, I may also apply bearish short term hedges (candlestick patterns) and index hedges, but typically that will only replace one of the 3 available spaces (to make it 11), or even one of the initial 8.

This "fund" or section of my capital has the goal of protecting my capital, and gains are a bonus.  Now since there are still elements of risk here and because uncertainty always favors risking more bets with less capital (except when commission becomes an issue), we will increase the cash position listed by 50% and use that as the capital towards the risk fund. What we're left with can be divided evenly among the capital. In this case, I actually will take the capital per bet if I were to use 11 trades so I have some extra wiggle room with the remaining capital to trade.
In this case the breakdown should be around 78% "capital preservation" and the remaining 22% into risk. Divide this by 8 and you have about a maximum of 2.75% per trade allowed. This means a minimum  of 3*2.75 or 8.25% must be in liquid cash at all times and the rest can be allocated into the "wealth preservation" aspect of the portfolio.

For those curious, the hypothetical option conversion uses about a 300 days left in time AT the money options. I have done the math and found using less actually boosts my results and going a bit out of the money does as well. It also allows greater amount of capital that I can allow per trade and overall, but I want to still plan a more conservative strategy first, and If I modify it, I want to know that it's safer and provides a better return. It's much better than having to grab a more conservative option only to realize after the fact that I have more capital at risk than I should have.

So this is ONE aspect of the trades, that does not mean that all 8 trades use 2.75%, but I can use up to 8 using this strategy which is a "stock replacement strategy". Work must then be done to calculate additional "strategies. The amount of capital towards the allocation fund must then be approximately averaged according to the strategies. However, I see no reason to complicate things with a lot of different strategies, and will begin shifting towards this strategy. Once I am comfortable with it, I may look into adding a high tight flag strategy and others.

This type of groundwork must be done to get a baseline of your strategy. I am okay with calling an audible as long as it is mathematically reasonable. That's all for now.