This is a companion article to last week’s Tales of a Technician blog which discussed position sizing core vs. non-core positions in your portfolio. The video below explores how I think about portfolio risk and making sure you don’t have too much exposure.
Notes
- $100k portfolio
- Risk 1% per trade
Max number of trades I can have and still be safe?
- Swing Trades – I can get stopped out these relatively quickly.
- 20 swing trades, all risking 1% per trade. Market plunges. I lose 20% this week. TOO MUCH!
- 8 max if they’re all like trades.
- Could do more 8+ depending on your strategy diversification.
- Based on your risk rule, you may discover that you are only investing $20k to $30k on a regular basis. Risk rules ALWAYS constrain how much capital you can invest.
- I want to avoid 1 losing month giving back 6,7,8 months worth of winners. If I can make 2% a month or 3% a month, then it’s okay to lose 8% in a bad month.
- Where it gets tricky is when you start looking at Core, long-term positions. Of necessity, you can’t use a tight stop loss on these.
- Covered calls, naked puts, long stock
- Protection is more a function of the position sizing than it is using a stop loss.
- Exercise when market breaks support and enters a downtrend: Go thru worst-case scenario for each position, see what the drawdown would be and make sure you can handle it.
- Expectations for SPY/IWM/EEM cov call/naked put
- 1x a year: -14%
- 1x every 5 to 6 years: -33%+
- Mega crash 1x every decade or two: -50%
- I can’t buy 100 shares of SPY for cov calls without a stop loss without expecting to see these kind of drawdowns in the future.
Risk Rules
- Risk per trade: 1%
- Monthly Loss Limit: 8%
- Limit myself to 8 trades max.
- This assumes these are all bull trades. Like positions.
- With strategy diversification, you could do MORE than 8 trades.
$100k portfolio. Review Team Phoenix positions. Worst-case if market keeps selling off. Am I comfortable with that?
- Short EEM $38 naked put. I get assigned, long 100 shares at $37.50, $3,750 of exposure or 3.75% of the total account. Estimated loss is 1% to 2% of account.
- Short (2) IWM $183 naked puts. I get assigned, long 200 shares at $181, $18,100 x 2 = $36,200 of exposure or 36% of the total account. Estimated loss if we crash 50% with good management is 9% of the account.
- Short DIS $100 naked put. I get assigned, long 100 shares of DIS around $99. Worst case this drops another 50%, I reduce the loss to $3k with covered calls. Estimated loss is 3% of the account.
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