When we diversity in the stock world, the only way of doing so is by purchasing many uncorrelated underlyings. When trading options, however, we have many more avenues to explore in order to achieve diversification.
- Diversify by Underlying/Trade Small
- Diversify by Strategy
- Diversify by Implied Volatility
- Diversify by Duration
Not included in the above slides, diversifying by duration is simply selling premium in different months of the option chain or by spreading out your position across different days instead of selling a lot of contracts at once. This reduces portfolio volatility.