Cleaning Up Your Portfiolio

 

Date: 6/29/2021
Author: Chris Hood

 


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.


Imagine you run a business that sells sporting goods.

Each month you make decisions about what you’ll keep in stock.

You place new orders for top sellers so you can keep them on the shelves, and need to determine what to with items that no one is buying.

After all, your goal is to make money.

Wasting space and advertising dollars on products no one wants just cuts into your bottom line.

If you can’t send them back to the manufacturer, the next best thing is to run a clearance sale. Even if you don’t turn a profit, you can at least recoup some of your investment.

This is the way you need to approach your options portfolio.

Consider each position as inventory.

You’ve bought long-dated calls on three different tickers based on your favorite bullish set-ups. However, you need to manage them based on their performance.

Ideally, they’d all run, and you’d take profits at predefined points.

Perhaps your profit target is percentage-based, and you sell for a 50 or 60% gain.

Or maybe you have a specific underlying stock price target in mind based on Fibonacci levels, Keltner channels, or some other predicted move analysis.

You could also be completely wrong about the direction.

In this case, you’d follow your exit strategy and get out with a little of a loss as possible.

Exits plans can be based on a simple percentage drop in the option value or something a bit more sophisticated. Often a breach of the 13, 21, or 34-period EMA signals an imminent price decline.

Whatever your rules, stick to them.

One of your greatest challenges – certainly one of mine – will come when your long call or bull call spread position does absolutely nothing.

The stock doesn’t go up or down.

You just have a position that stagnates and takes up space in your portfolio.

It will tease you – occasionally showing signs of life before immediately dropping back its original value. Or it may decline slightly but not quite enough to trigger your exit.

It’s just like a store product that no one wants.

And what’s worse, theta decay slowly erodes its value.

Decision time.

Do you keep it, hoping it will eventually work out, or cut it for a minor loss to free up some of your capital?

Let me make something abundantly clear – HOPE has no place in trading.

Wishful thinking will wipe you out.

So the only real question is, “Just how long will you give these positions to earn the right to stay in your portfolio?”.

Let me suggest developing a duration rule.

Before you place a trade, decide how long you intend to wait before it moves towards profitability.

Give it ample time to prove its value in your portfolio. If it sits idly by doing nothing but tying up your trading capital, kick it to the curb.

Sure, you might take a slight loss, but provided you’ve sized your positions appropriately, you can make that money back and more on another winning trade.

Don’t let these trades overstay their welcome.

How much time you decide to allot is up to you.

For longer-dated expirations (90+ days), you might set a deadline of 10-15 days.

Give those with closer expiration dates less time.

Stocks shares don’t depreciate in value – you can hold them for as long as you’d like waiting for a run.

Whenever you buy long calls or puts, you’re working against time erosion from the moment you place the trade.

Swallow your pride and admit you’re wrong.

Cut loose any trades that aren’t earning you profits.

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