Asset Allocation help needed

J

jackfrost

Hi all, need a little help here on an assett allocation question.

Lets say I have 400k to trade. I watch about 80 stocks. At any one time there are about 10 that are in place for either a long or a short.
I generally take the view that in a LONG market i will trade more of my $$ in long trades than short trades. Consolidating markets are evenly balanced and SHORT markets are more short oriented.

Lets say for example I decide that i am not going to trade no more than $100k on any one trade and I will place my stops so that my maximum capital at risk is 2.5%. My reallife example is as of MOnday I am looking at placing placing a long trade on XYZ (closed at $43.06) with a stop at $41.95. My risk is roughly $2500. Now on the last 5 trades I have averaged $2.56 per trade (over 5 days) so my potential profit is $5000 (a bet of $1 to make $2) I am happy with that.
My question is:
A. Am I better off buying short term options (May or June) with all my risk capital and placing the other $97K into other option trades?
If the answer is yes, I am then really up the creek because I would have to find 40 option trades to utilise my $100k- THAT is more than hard work.
Too hard to do managing 40 different trades by myself.
B. Am I better off breaking the $100k into 4 portfolio's and buying longer term options or LEAPS say, with $25k of premium and placing a stop loss at say 10%. That blows my 2.5% risk right out of the water.
C. Your suggestions ...
Any suggestions or pointers will be greatly appreciated.
Regards
Jack
 
Are these all big, liquid stocks you are trading? If so, options could work for you. But if you have some smaller caps, then there might not be active options on those stocks and you'll have to stick with the equities.

And if you do switch to options, don't go and increase your number of positions by a huge amount. With stocks, if you are wrong you lose your 2.5% limit. But with options, if you are wrong, you can lose a large fraction of the premium you paid for your options. Buying 100 shares of a company and buying two at the money calls on the same company have about the same amount of risk, even though it takes a lot less capital to buy the two calls.

I'd recommend paper trading your strategy for awhile if you switch to options. Not so much to figure out if your strategy works, but to get a feel for the risk of loss for the inevitable times it doesn't.
 
Am curious about your fund and have a couple of questions if you don't mind answering.

What vehicles do you normally trade? Futures, options, stocks?
Do you use some discretion on timing relating to entries, exits or is it mostly automated?

Thanks, and keep up the good work!
 
Quote from IndexTrader:

What vehicles do you normally trade? Futures, options, stocks?
Do you use some discretion on timing relating to entries, exits or is it mostly automated?
More...

Thanks, IndexTrader. Schindler Trading trades futures (NQ, Dax, T-notes, & Euros) and is 100% systematic. See our website at www.schindlertrading.com for more info.

Let me know if you have any other questions (but so as not to impose on Jack's asset allocation topic, please email or PM me).
 
A/ no

B/ no

C/ If 400K is all cash you have , you should put 200K in insured muni's as your retirement fund . 100K in longer term quality stock strategy like "Dogs of Dow " and use 100K to swing ( day ) trade Big caps like GE, MSFT and also QQQ,SPY and DIA . Using ( buying ) option only is a losing proposition , you leave at least 10% of a profit on a table as a spread .
You can make money with options up to 40% per year but you have to write them boomerang style .
 
Hi all, need a little help here on an assett allocation question.

Ok, but asset allocation is not what you are asking. IMHO you should be asking your question like this. Should I just trade equities with my entire portfolio, and if I do, how should I diversify?

Lets say I have 400k to trade.

Ok, so now you need to decide , How much in Equities? How much in income producing? How much in cash?...Municipals? Speculation?... etc... Then tax considerations are necessary with this term you are using "asset allocation"

I watch about 80 stocks. At any one time there are about 10 that are in place for either a long or a short.
I generally take the view that in a LONG market i will trade more of my $$ in long trades than short trades. Consolidating markets are evenly balanced and SHORT markets are more short oriented.

This is not allocation, this is forecasting direction on one instrument to form a bias

Lets say for example I decide that i am not going to trade no more than $100k on any one trade

you should be saying this when deciding how to allocate with DIFFERENT vehicles

and I will place my stops so that my maximum capital at risk is 2.5%.

This is "trade managment"

My reallife example is as of MOnday I am looking at placing placing a long trade on XYZ (closed at $43.06) with a stop at $41.95. My risk is roughly $2500. Now on the last 5 trades I have averaged $2.56 per trade (over 5 days) so my potential profit is $5000 (a bet of $1 to make $2) I am happy with that.

This is risk reward ratio, risking $1 to make 2 or 1:2. I have seen this term reversed too, like reward/risk ratio...2:1. Some good traders (trading retail) say that you should try for targets triple your risk.

My question is:
A. Am I better off buying short term options (May or June) with all my risk capital and placing the other $97K into other option trades?
If the answer is yes, I am then really up the creek because I would have to find 40 option trades to utilise my $100k- THAT is more than hard work.
Too hard to do managing 40 different trades by myself.
B. Am I better off breaking the $100k into 4 portfolio's and buying longer term options or LEAPS say, with $25k of premium and placing a stop loss at say 10%. That blows my 2.5% risk right out of the water.
C. Your suggestions ...
Any suggestions or pointers will be greatly appreciated.
Regards

You should not be trading your 400k in equities and options only. Split it up. If you like to stay active use 15% of your portfolio for specualtion. You are thinking correctly, but I would never put all my money in one basket. Try to balance yourself so that if your forecast is wrong your able to reverse by just re-balancing your portfolio. You could never be forced to exit until you want to remove excess, then you could be MrMarket Jr. and say you never have losing trade.

Michael B.
 
Quote from Aaron:

Are these all big, liquid stocks you are trading? If so, options could work for you. But if you have some smaller caps, then there might not be active options on those stocks and you'll have to stick with the equities.

And if you do switch to options, don't go and increase your number of positions by a huge amount. With stocks, if you are wrong you lose your 2.5% limit. But with options, if you are wrong, you can lose a large fraction of the premium you paid for your options. Buying 100 shares of a company and buying two at the money calls on the same company have about the same amount of risk, even though it takes a lot less capital to buy the two calls.

I'd recommend paper trading your strategy for awhile if you switch to options. Not so much to figure out if your strategy works, but to get a feel for the risk of loss for the inevitable times it doesn't.
More...
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Jackfrost;
Good question & like Aarons answer & noticed Aaron made about 75% last year.

10-15% may be practical option stop loss;
slippage /bid ask add 10% more for an occasional option index.
QQQ index option is PLENTY diversified & plenty liquid.

Even further diversifying with 3 or so days scale in occasional buy with index options;
sideways move in stocks can prosper with dividends,
options decay when underlying moves sideways.


Its complex enough even with liquid index options ;
dont care much for front month [may] options & prefer papertrade & trade index options 3-5 months out .

50 k scale in papertrade may be better than 100k paper trade ;
looked at many stock options but few i ever wanted to papertrade ,even less actual traded.

You know you have a complex market when one doesnt even want to papertrade much of it ;
enjoy the work of recording my own data on liquid index options.




:cool:
 
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