How much of your trading capital do you risk per trade?

[aus_trader]

Yes, but I would be buying the shares at a cheaper than than if I had just purchased them outright at the start.

For example, let’s say we both think CBA is worth $72 per share.

So you purchase 1000 shares costing you $72,000.

Where as I might agree with you that they are worth $72, but rather than buy the stock as you did, I might instead sell a $70 put option for $1.50, expiring in 3 months.

So I end up keeping my $72,000 in the bank earning 4.90% interest + I collect $1500 in put option premium + if I do have to buy the shares I get them $2000 cheaper than you did.

So my strategy is actually a lower risk strategy than buying the shares outright upfront.

You would make more money if the shares skyrocketed, but I would make more money if the market were down or flat, so the put option strategy is a bit more conservative.

So VC, do you employ this type of strategy in all types of markets? e.g. Bull, Bear, Flat? Or do you try to avoid writing naked puts in bear markets once the direction is clear ? Of course no one can predict if the market crashes suddenly out of the blue.

 

[HelloU]

Yes, but I would be buying the shares at a cheaper than than if I had just purchased them outright at the start.

For example, let’s say we both think CBA is worth $72 per share.

So you purchase 1000 shares costing you $72,000.

Where as I might agree with you that they are worth $72, but rather than buy the stock as you did, I might instead sell a $70 put option for $1.50, expiring in 3 months.

So I end up keeping my $72,000 in the bank earning 4.90% interest + I collect $1500 in put option premium + if I do have to buy the shares I get them $2000 cheaper than you did.

So my strategy is actually a lower risk strategy than buying the shares outright upfront.

You would make more money if the shares skyrocketed, but I would make more money if the market were down or flat, so the put option strategy is a bit more conservative.

OT
is that 4.9% a made up thing for the example, or does it exist?

 

[Value Collector]

So VC, do you employ this type of strategy in all types of markets? e.g. Bull, Bear, Flat? Or do you try to avoid writing naked puts in bear markets once the direction is clear ? Of course no one can predict if the market crashes suddenly out of the blue.

I don’t pay attention to whether the market is bull or bear, I base it on my valuation of he underlying company.

If valuations went to high, and I couldn’t get decent premiums at strikes I was comfortable with I would cease writing puts, like wise I would continue writing puts if the valuation was good, even if it was a technical bear market

 

[Value Collector]

OT
is that 4.9% a made up thing for the example, or does it exist?

I can earn 4.9% on my money by putting it in my offset account linked to my investment property loan, it’s possible to significantly offset the interest I get charged doing this.

Also I can earn over 6.5% on the rate setter platform.

 

[tech/a]

I don’t pay attention to whether the market is bull or bear, I base it on my valuation of he underlying company.

If valuations went to high, and I couldn’t get decent premiums at strikes I was comfortable with I would cease writing puts, like wise I would continue writing puts if the valuation was good, even if it was a technical bear market

Would you write that same put if the company had been falling for X periods IE weeks to Months?

 

[Value Collector]

Would you write that same put if the company had been falling for X periods IE weeks to Months?

If I am confident in the company yes.

I did that on Fmg, and so far have made nearly $1 million in profit.

Yesterday’s dividend announcement is worth $118,200 to me, and the only reason I have that many FMG shares is because I have been writing puts against it for about 5 years, and had some of my positions exercised along the way.

I have funded almost my entire fmg position by using options premiums I have collected to purchase the few contracts that get exercised every now and then.

 

[tech/a]

Now that is impressive.

So getting to know a company intimately makes a lot of sense.
So your not a believer in spreading risk over a portfolio of say 10-40 stocks

I actually remember a guy years ago who write Puts on the FTSE for his
Super. He was an English guy and at the time he said it was like shelling peas!

 

[Value Collector]

Now that is impressive.

So getting to know a company intimately makes a lot of sense.
So your not a believer in spreading risk over a portfolio of say 10-40 stocks

I actually remember a guy years ago who write Puts on the FTSE for his
Super. He was an English guy and at the time he said it was like shelling peas!

As I said above, I think a portfolio of 6 or 7 shares with about to 50% in my favorite is enough diversification for me.

But, for 99% of the population I would recommend extreme diversification , eg something like an index fund.

—-

Actually including dividends my fmg position is well over $1 million in profit.

 

[IFocus]

Thats impressive VC not many around with that sort of record well done.

Not so much the numbers but the strategy / reasoning, of course always nice to get the returns

 

[aus_trader]

As I said above, I think a portfolio of 6 or 7 shares with about to 50% in my favorite is enough diversification for me.

But, for 99% of the population I would recommend extreme diversification , eg something like an index fund.

—-

Actually including dividends my fmg position is well over $1 million in profit.

It takes someone with nerves of steel to pull off something like that. I think you are truly an exception (legendary even) because many of the naked put sellers I have known have been burnt beyond recovery. That's a small % who do admit, the rest are too shameful to admit what they've done with their money.

I respectfully agree, that most people may be better to stick to an index fund for example because things can go wrong even with the best of the best when it comes to individual companies.

 

[Value Collector]

It takes someone with nerves of steel to pull off something like that. I think you are truly an exception (legendary even) because many of the naked put sellers I have known have been burnt beyond recovery. That's a small % who do admit, the rest are too shameful to admit what they've done with their money.

I respectfully agree, that most people may be better to stick to an index fund for example because things can go wrong even with the best of the best when it comes to individual companies.

I think the most important this is to really have the skills to value the company and be sure that your entry price is well below its fair value based on likely long term economics of the business.

Then make sure you don’t over extend yourself, and make sure you have the resources available to carry the trade through to the end.

I had a large holding of other shares I could use as collateral, which meant I didn’t have to put up cash margins.

I also set up a $500k margin loan ready to fund any large purchases I had to make in excess of the premiums I collected.

I did end up having to use the margin loan, but the dividends from the shares and the continuing flow of premiums paid that down steadily.

 

[aus_trader]

Then make sure you don’t over extend yourself, and make sure you have the resources available to carry the trade through to the end.

I think this is what you have done well. It is easy to get carried away collecting premiums and a lot of the people who didn't succeed didn't understand it or take it into account. I guess for them it would have been easy to get greedy writing larger and larger numbers of contracts when it felt like free money rolling in.

 

[Value Collector]

Wow that took me 3 hours to read.

What do you think about that thread, All up I think it is a pretty good thread.

 

[willoneau]

yes i enjoyed it , gave me an insight into what you do and need to know

 

[Frankieplus]

In regards to the 1% thing, is that meant to be calculated from your starting capital all the time or from your cash account balance?

let's say you start your trading account with $30k and then after a few weeks have a few trades going and your cash account now has $10k in it.

For your next trade do you calculate 1% of 30k ongoing still? Or do you calculate 1% of the $10k in your cash account?


-Frank

 

[tech/a]

From Trading Capital--total
So $300 a trade.

 

[willoneau]

In regards to the 1% thing, is that meant to be calculated from your starting capital all the time or from your cash account balance?

let's say you start your trading account with $30k and then after a few weeks have a few trades going and your cash account now has $10k in it.

For your next trade do you calculate 1% of 30k ongoing still? Or do you calculate 1% of the $10k in your cash account?


-Frank

you only want to risk 1% of what you have not what you had. Can also work the other way as your capital grows, I use closed positions to calculate my 1%
Was thinking your capital fell to $10 000 (losses) not used to open positions.

 

[aus_trader]

From Trading Capital--total
So $300 a trade.

Good question Frankieplus and good answers willoneau and tech/a.

If I could add to that, you should always work out the risk per trade and position size at the start of trading from the starting capital. For example in your case let's say you are going to risk 1% i.e. $300 per trade on your $30k pot. You can put 10 positions at $3000 each and if any position goes against you by 10% cut it off manually or using a 'Stop Loss'. In that case 10% of a $3000 position is $300 or 1% of your starting capital.

 

[willoneau]

Good question Frankieplus and good answers willoneau and tech/a.

If I could add to that, you should always work out the risk per trade and position size at the start of trading from the starting capital. For example in your case let's say you are going to risk 1% i.e. $300 per trade on your $30k pot. You can put 10 positions at $3000 each and if any position goes against you by 10% cut it off manually or using a 'Stop Loss'. In that case 10% of a $3000 position is $300 or 1% of your starting capital.

I think your risk determines position size which can possibly be more or less than $3000
using and flat 10% stop may not be appropriate depending on perceived support and resistance.

 

[aus_trader]

I think your risk determines position size which can possibly be more or less than $3000
using and flat 10% stop may not be appropriate depending on perceived support and resistance.

Yes willoneau is right on the money, my explanation was a simplistic explanation of how to divide up your capital for a 1% risk per trade.