You know how to manage an individual trade. But do you know how to handle a basket of individual trades? Is there a difference? Can’t you just plan your trade and trade your plan? Or do you need to modify things once you’ve accumulated five, ten, or 15 holdings?

These are the questions that plague the curious mind. Today, I’ll answer them, and provide a simple way to manage your portfolio delta.

There are various ways to address the question of determining the appropriate level of portfolio exposure. Some set monthly loss limits to contain drawdowns during a losing streak. If you’re risking 1% per trade, then perhaps you set a monthly loss limit of around 8%. Adopting this tactic means you have to track your overall portfolio exposure (whether you have one position or 20) to ensure an adverse move in the market doesn’t inflict too much damage.

Another method focuses on your willing daily account fluctuation and ties it to your portfolio delta. That’s the one I’m going to use today.

Beta Weighted Deltas

The metric used by professional traders to measure the exposure of a portfolio is beta weighted delta. You’ll recall that delta reflects how much your position will make/lose if the underlying stock rises $1. If you have an AAPL trade with a +50 delta, then you’ll gain $50 per $1 increase in the stock.

But that +50 delta is specific to a $1 move in Apple.

Suppose you also had a bullish MSFT trade with a +20 delta. That means you’ll make $20 per $1 increase in Microsoft stock.

But that +20 delta is specific to a $1 move in MSFT.

You can’t add 50 AAPL deltas to 20 MSFT deltas. It’s apples and oranges. A $1 move in AAPL is not the equivalent of a $1 move in MSFT for two reasons.

One: They have different stock prices, so $1 represents different percentages.

Two: Even if they had the same stock price, they don’t have the same volatility. Maybe AAPL moves 1% a day while MSFT moves 1.5%.

To overcome these differences, we need to find a common denominator so we can restate the deltas in like terms.

That common denominator is the S&P 500. By analyzing the historical relationship between AAPL and SPY, we can translate the AAPL deltas into SPY deltas.

Let’s say the 50 AAPL deltas are the equivalent of 30 SPY deltas. So your Apple trades beta weighted SPY delta is +30. That means if SPY rises $1 tomorrow, you will make $30 on your AAPL trade.

Suppose further that the 25 MSFT deltas equate to 20 SPY deltas. That means if SPY rises $1, you will make $20 on your MSFT trade.

Now that we’ve stated both positions in like terms (SPY deltas) we can add them together:

AAPL Trade: AAPL Deltas +50, aka SPY deltas +30

MSFT Trade: MSFT Deltas +25, aka SPY deltas +20

Portfolio Beta Weighted SPY Deltas = +50

ThinkorSwim will display your portfolio’s Beta Weighted SPY deltas on the Monitor tab if you click the right button. Here’s a screenshot:

Now that we know how to calculate the overall exposure, we need to discuss how to figure out how much exposure you are comfortable with.

Willing Daily Account Fluctuation

Earlier this year, I wrote about this same topic and laid the groundwork for today’s discussion. I’m borrowing from that earlier post below:

“Coming up with the appropriate range for your exposure involves three simple steps. Before I get into them, let me mention one important takeaway. There isn’t one right way to do this. You could use a variety of metrics to determine an appropriate amount of exposure. My preference is to focus on your willing daily fluctuation of the account value. Think of it as how much movement you’re willing to stomach in your account value.

Step One: Determine your willing daily fluctuation in dollar terms

Step Two: Find the Average True Range (ATR) of the S&P 500 ETF (SPY)

Step Three: Divide the willing daily fluctuation by the ATR

The final number is the max beta weighted delta appropriate for your account.

Case Study

If you read the three steps and grasped everything on the first pass, congratulations. You’re smarter than the average bear. For everyone else (like me), an example will help. We’re going to assume you have a $30k account and are comfortable seeing it rise or fall 2% ($600) a day.

Step One: Willing daily fluctuation = $600

Step Two: SPY ATR = $3.21

Step Three: $600 / $3.21 = 187

187 is the magic number. That’s the max delta you want to have in your portfolio. And, to be clear, we’re talking about the SPY beta weighted delta. If you let it creep above 187, then you will likely see greater than +/- 2% fluctuations in your account. Also, remember that the ATR is the average day. That means the average trading session should deliver a gain/loss of 2% to your portfolio. Days boasting more volatility than normal will likely see greater than 2% swings in your account value.

Here would be the appropriate range for my $30k account:

Max bullish: +187 delta

Neutral: 0 delta

Max bearish: -187 delta

At times when I’m aggressively bullish (a +3 in our oft-referenced bias spectrum), I could let my account delta push towards, but not beyond +187 deltas. When I’m aggressively bearish (-3), I could let my account delta drift towards -187.”

-That’s the end of the prior post reference. Now let me add a few insights.

Final Takeaways

When the ATR changes, the appropriate delta changes. Right now, the ATR of SPY is only $2 which is quite low. Maxing out your delta exposure in a low ATR environment is more dangerous than doing so in a high ATR environment. Remember, ATR is mean-reverting which means low readings eventually give way to high readings. That can cause what was initially an acceptable delta to quickly become too high.

Once you’ve discovered your max delta, you can better use the directional bias matrix you see us reference here at Tackle Trading. Here’s an example expanding on the above case study.

Max bullish (+3) : +187 delta

Moderately bullish (+2): +100 delta

Mildly bullish (+1): +50 delta

Neutral: 0 delta

Mildly bearish (-1): -50 delta

Moderately bearish (-2): -100 delta

Max bearish (-3): -187 delta

Directional Bias + Proper Deltas = Magic

You might differ on the exact delta you use for each bias, but the idea of a stronger directional opinion warranting more delta exposure should be consistent among all traders.

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