One of the most important elements to risk management is managing your position sizes. People get into trouble because they risk way too much of their account, and then when they lose, lose big. Smaller position sizes will help you avoid that fate, while still experiencing consistent gains. This will be our topic today in episode 9.
- The S&P finished the second quarter with its best performance since 1998.
- Though futures were red before open, indices rose on news that Pfizer Inc. (PFE) may have seen positive results from its coronavirus vaccine.
- Volatility continued to contract, back under 30 for the first time in 3 weeks.
[09:30] – Ask Possible Promise
- Covered calls are when you sell a short call against existing shares you hold of a given stock.
- Covered calls are a great way to make money off of stock you already own.
- Usually I recommend targeting a probability OTM of 70% or more for the short call, or a delta of 0.3 or less.
- You may sell either weekly or monthly calls: weeklies provide a bit more profit but also higher risk.
- Any reasonably-priced stock that you are neutral-to-bullish on will work for this strategy.
- You may want to avoid stocks that may have large moves to the upside, since this will almost guarantee your covered call is assigned and your stock is called away.
- Ideally you want to have several cycles of your calls expiring worthless in order to rake in more premium.
[20:34] – Manage Your Position Sizes for More Consistent Gains
- You don’t want to risk too much in one trade, because if it goes against you, your entire portfolio could experience a significant loss.
- Never risk more than you are willing to lose in its entirety.
- Recommended position size is 2-3%, with an absolute maximum of 5% for high-probability trades.
- It may not seem like a lot, especially for small portfolios, but it adds up.
- Total positions should not exceed 50% of your portfolio.
- If you choose to also hold stock, limit it to 20-30% of your portfolio.
- Try to keep at least 20% in cash at all times, to have liquidity for managing your options positions as needed.
- It’s OK to speculate and make risky trades, but limit it to no more than 1% of your portfolio.
- It can seem boring, since it might take 2 weeks just to allow a $50 position to profit, but with a portfolio of 15-20 positions, it will add up.
- See also our podcast on Slow & Steady.