Advanced Option Strategies » Portfolio Management http://advancedoptionstrategies.net Moving beyond the simple things... Fri, 13 Aug 2010 20:14:58 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Online Options Trading – Portfolio Measures and Trade Performance Metrics http://advancedoptionstrategies.net/online-options-trading-a%c2%80%c2%93-portfolio-measures-and-trade-performance-metrics http://advancedoptionstrategies.net/online-options-trading-a%c2%80%c2%93-portfolio-measures-and-trade-performance-metrics#comments Tue, 12 Jan 2010 19:34:12 +0000 admin http://advancedoptionstrategies.net/online-options-trading-a%c2%80%c2%93-portfolio-measures-and-trade-performance-metrics The Reward of Profit and the Risk of Losses for retail option trading needs to be managed at 2 related levels of performance: Portfolio and Trade Specific.At the Portfolio level for online options trading, there are 3 types of Targets that must be set, even before you trade.Maximum Return Target: complete achievement of the “ideal” measure. Dream of the “ideal” that stretches you beyond what is practical. For example, earn 2-3 times your monthly living expenses with the monthly trading profit. This is to stretch your imagination well beyond mediocrity. Even if you fail, you just might end up with more than your original target.Minimum Return Target: the lowest acceptable measure, achievable under most conditions, excluding a catastrophic market event. Use the historical annualized return of the S&P 500 between 10%-12% (prior to the 2008 financial pandemic), as the lowest acceptable boundary.  The S&P 500 being a widely accepted benchmark for trading equities is adequate to base the minimum target off, though your portfolio needs to be profitable – being ahead of the $SPX in negative territory does not count.  Below the historical annualized return range of 10%–12%, is the 3 Month T-Bill, presently near zero.  While the T-bill theoretically represents an “absolutely” zero risk investment, even the safest investments will still carry a residual amount of risk no matter how small that risk is.  The point is this.  You got into options and all that Greek terminology, not to make salads; but to beat the performance of equities as an asset class.  If your portfolio’s return is between what is near zero-risk and 10%–12% per annum, you are just delaying reaching a point of pain that marks failure in grasping the base-line ability to control risks.  If the returns of your portfolio are between 0%–12% and you plan to continue trading options, processes within your trading process will need to be re–engineered.”Halt Trade” Target: cumulative losses reach an absolute amount below the Minimum Return, making it necessary to stop trading altogether for a stated period.  10% of [(60% x Cash Balance at the start of the year); or Net Liquidating Value].  Example, for a $50,000 trading account, 10% x (60% x $50,000) = $3,000 of losses in total, is the absolute amount to halt trading.  Why 10%? Blowing up your self-funded capital is final.  There is no bail out package, as a home options trading business does not have access to bank loans; or, shareholders’ equity to finance your personal trades.Now, drilling down to Trade Specific performance measures.Even before you calculate the metrics, characteristically, what makes for a consistently managed portfolio are these traits:

Where can I see this step up function in a consistently profitable portfolio, with these portfolio measures and trade performance metrics? Follow the link below, entitled “Consistent Results” to see a model retail option trader’s portfolio that shows these traits.Moving onto the hard metrics.  There’s 2 ways to count the Return on your trading capital.

In both cases, you can minus the Total Cost of Commissions from Total Profit, to get a Total Net Profit number.  The, divide the Total Net Profit by the Start of Year Cash Balance; or, Net Liquidating Value.  Net Liquidating Value is how much your entire trading account is worth, which is equal to Total Cash + Options Value + Stocks Value + Commodities Value + Bonds Value. The Start of Year Cash Balance is straightforward – it is the money in the account at the beginning of that trading year. Cash increases when you are short securities; but, cash decreases, as you get long on securities.To review your performance, calculate these metrics using the Profit (wins) and Loss (losers) from your account:

The Average Win divided by the Average Loss measures how RESPONSIVE you are in taking profits and cutting losses.Combine the Accuracy ratio with the Responsiveness ratio to get your Performance Ratio.Performance Ratio = (Win/Loss Probability) x (Average Win / Average Loss).  Always aim to maintain the Performance Ratio above 1.00. Why?  The commonly known money management rule is to allocate 2%-5% of (60% x Net Liquidating Value of the account) per trade.  What is not commonly practiced is the discipline of moderating a +/- 1% in trade allocation between the 2%-5% allocation.

This is how to achieve a ladder effect in stepping up profits and stepping down losses. This mechanism of stepping up/down is an indispensable tool for rewarding profit and to discipline the risk of losses.  It forces you to improve both ACCURACY and RESPONSIVENESS before raising your position size.

Where can I learn more about portfolio measures and trade performance metrics as part of a total trading system? Follow the link below, for 55 hours of video-based learning of online options trading from home.

]]> http://advancedoptionstrategies.net/online-options-trading-a%c2%80%c2%93-portfolio-measures-and-trade-performance-metrics/feed 0 Options Trading Strategies – Intermarket Analysis in Brief for Retail Asset Allocation http://advancedoptionstrategies.net/options-trading-strategies-a%c2%80%c2%93-intermarket-analysis-in-brief-for-retail-asset-allocation http://advancedoptionstrategies.net/options-trading-strategies-a%c2%80%c2%93-intermarket-analysis-in-brief-for-retail-asset-allocation#comments Tue, 01 Dec 2009 08:11:42 +0000 admin http://advancedoptionstrategies.net/options-trading-strategies-a%c2%80%c2%93-intermarket-analysis-in-brief-for-retail-asset-allocation If you are trading a mix of Verticals, Calendars and Iron Condors across highly liquid indexes like the DJX, DIA, MNX, QQQQ, RUT, SMH, SPY and XSP, is your trading risk adequately diversified? No.In choosing the MNX, QQQQ, SMH, SPY and XSP, there is a duplication of stock components in these Indexes: for example, AMAT (Applied Materials) is a component of all 5 Indexes.  Bear in mind the MNX and the QQQQ are both smaller versions of the Nasdaq100 Index, the only difference being the MNX is an European styled cash settled Index and the cubes (QQQQ) is an American style stock settled Index.  Another example, Apple (AAPL) is a component of the MNX/QQQQ and SPY/XSP – both the SPY and the XSP track the S&P 500, the SPY is American style stock settled and the XSP is European style cash settled.  Duplication is not diversification.  Even if you allocated capital to the smaller versions of the Dow: DJX, the European style cash settled version of the DIA which is the American style stock settled version.  Moreover, if you extended capital allocation to trade the RUT, thinking you are diversifying into small-cap stocks and away from large-caps, you just sunk more of your trading capital into equities.  Again, you cannot achieve diversification by adding more capital in the same asset class.  You need to learn how to trade options without concentration risk in stocks.  Do not confuse asset category (market capitalization) with asset class.This is where there is a need to understand Intermarket relationships.  Intermarket analysis requires the simultaneous analysis of 4 main Asset Classes: Currencies (U.S. Dollar remains most liquid of all major traded currencies), Commodities, Bonds and Stocks.  Synchronizing the rotation of asset allocation within your own portfolio lies in getting a grip on how these four markets interrelate with each other.Here’s the synopsis of the relationships.  Commodities lead bonds, bonds lead stocks and stocks lead commodities.  The cycle holds true at least in a normal inflationary/disinflationary environment.  Other than itself, Commodities affects 2 markets (Bonds and Stocks); effectively, impacting 3 out of the 4 Intermarket relationships.  Even if you do not trade Commodity ETFs as part of your portfolio, you need to track Commodities as a leading economic cycle indicator.  The futures/Mini Futures that you see on news headlines/trading screens are relevant only as daily gauges for stock market behaviour.  They are not a cycle indicator across Asset Classes.So, you may already understand the criteria to define a “normal” economic cycle for the Directional Relationships to behave “ideally” (see below); BUT, how do you determine which Asset Class is driving the cycle? In other words, at a given point in the Intermarket cycle, how do you determine which Asset Class has the DOMINANT Relative Strength to trade? Follow the link below for a video-based course, to learn how Relative Strength – a rotational algorithmic measure is used to replace conventional Fundamental Analysis, as an asset allocation technique.Moving on, here’s the Business Cycle in brief.  Bonds lead stocks, to trend in the same direction – except during deflation when bonds rise and stocks fall.  On average bonds are 18 months ahead of stocks in rising to their peak or falling to their bottoms; thereafter, stocks follow in the same direction.  If bonds have not broken down yet, this extends the gains in the stock market, acting as support for prevailing stock market levels.  The real risk begins to build 5-7 months after the bond market peaks or bottoms, thereafter the next 6 months stocks accelerate in the direction bonds have set.Typically, commodities and bonds have an inverse relationship: as commodities rise, bonds falls but as commodities fall, bonds rise. Inflationary expectations affect bond prices. US Dollar movements which is tied into Monetary Policy changes affects commodity prices.  Commodities lead bonds 12–18 months in advance (it takes this long for Monetary Policy to come into effect) and 24–27 months before the economy fully absorbs the policy changes.Now, the relationship between commodities and stocks. Stocks tend to lead commodities. Commodities are a hedge against inflation, with price inflation and higher inflation expectations occurring towards the end of the business cycle.Money and company growth using credit (loans) takes time to make its way through the economic system, from making prices rise to raising expectations on inflation. Thus, commodities usually outperform at the end of the business cycle.Rising bond prices generally raise stock prices in recovery, with falling commodity prices confirming an economic expansion phase is in play. As the expansion matures and begins to decelerate, watch for bonds to turn down first (as interest rates rise), followed by stocks.Finally, it is after commodities outperform stocks and start turning down, this signals the end of an economic expansion with the probable start of activity decelerating, then slipping into an impending recession.Retail traders can keep reading about the economics of inter–market analysis and asset diversification. Though, they will not solve these key issues, every option trader trading with USD $25-$50K or less, must deal with for retail asset allocation purposes:

… if you can afford to diversify …

Where can I learn how to trade options profitably using Intermarket analysis with retail asset allocation methods? Follow the link below, entitled “Consistent Results” to see a profitable retail option trader’s portfolio that is set up to cycle in and cycle out of Intermarket relationships, between asset classes.Why is it possible? I’m using optionable ETFs (Commodity, Currency, Emerging Market and REIT), as well as optionable broad based/sector Equity Indexes, to trade the volatilities of each respective asset class. I do not need to trade Commodities and Currencies directly.  Remember, volatility can be added to/reduced from the portfolio, as not all Asset Classes or Sectors or Individual Companies or Countries move up/down in value ALL at the same time; and/or, ALL at the same rate.

]]> http://advancedoptionstrategies.net/options-trading-strategies-a%c2%80%c2%93-intermarket-analysis-in-brief-for-retail-asset-allocation/feed 0