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all eggs in one basket or spread your eggs out?
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Well here is a question for probably the more seasoned traders out there. Personally the way I handle my trades is I go all in, I believe this is usually the best way to capitalize on strong gains and most of the time it has definitley been right. Now, what I was wondering is if there is anybody else that uses this same strategy and what do you guys do to reduce your risks as much as possible, I would also love to hear from people who dont use this strategy and decide to spread their eggs out....I am sure anybody who leaves a post will help others out and myself.
Good question, and it depends on the Vix. If you know the market direction then I like to go all in. However with a low vix or even a high one you can make money by buying say Dec. deep in the money puts, and Oct. calls at the money. What I am doing is protecting myself from a bounce up. If the stock bounces way up I can sell the calls and wait for the downward move. Have not been doing that lately and personally have traded very poorly jumping out at the wrong times. However I am working many hours and do not have time to trade. Sometimes it is not about making a lot of money it is about making steady money. If you double your portfolio once a month in a year you will be a millionaire.
From a theory perspective the Kelly formula (aka Kelly criterion, Kelly bet) describes the long term growth of bets with positive edge. The formula calculates the size of the bet as a fraction of your portfolio/bankrol based on how much you can win and the probabilities of winning. Just Google "Kelly formula" I am sure it will come with plenty
Really they are many things you would have to know to use the Kelly formula. I try to keep it simple but (kelly formula) would be very helpful if say you were buying some 20 cent options very close to expiration.
"Kelly formula" For the investor who does not re-invest the profits, but only invests a set amount each time, this rule does not apply; instead the investor should choose the investment with the greatest arithmetic mean.[4]
Kelly criterion is actually much more dynamic then a simple 1 size fits all formula, but it is a series of formula describing risk.
The book "fortune's formula" really is the best book you can read on the matter.
In it they show charts showing the effects of under and overbetting. for example, you can get 3/4ths the return with half the volatility by risking 1/2 the kelly, while overbetting it results in a lower long term return.
However, if you regularly deposit money to your account you can actually be more aggressive than the kelly suggests directly correlated to the percentage of your portfolio that a monthly deposit equals and the frequency of trades per deposit. If you deposit $1k a month into a $1M account, and trade 20 times a month, you would completely want to respect the kelly. If you instead deposit $1000 into a $10,000 account, and only trade 1 time a month you can risk more knowing that $1000 will quickly replenish potential losses and it will not require you to reduce position size at all if you were to lose 10% in a single trade.
Of course the time before you need the money is also crutial as the "long term growth" assumes a very long period of time. You are probably better off being more conservative since we do have a limited amount of trades.
This page has a good table on probability of seeing X number of losses over a 50 trade period based on the probability of winning
http://stocktradinginvestments.com/the-greatest-secret-in-investing/
The book "fortune's formula" really is the best book you can read on the matter.
In it they show charts showing the effects of under and overbetting. for example, you can get 3/4ths the return with half the volatility by risking 1/2 the kelly, while overbetting it results in a lower long term return.
However, if you regularly deposit money to your account you can actually be more aggressive than the kelly suggests directly correlated to the percentage of your portfolio that a monthly deposit equals and the frequency of trades per deposit. If you deposit $1k a month into a $1M account, and trade 20 times a month, you would completely want to respect the kelly. If you instead deposit $1000 into a $10,000 account, and only trade 1 time a month you can risk more knowing that $1000 will quickly replenish potential losses and it will not require you to reduce position size at all if you were to lose 10% in a single trade.
Of course the time before you need the money is also crutial as the "long term growth" assumes a very long period of time. You are probably better off being more conservative since we do have a limited amount of trades.
This page has a good table on probability of seeing X number of losses over a 50 trade period based on the probability of winning
http://stocktradinginvestments.com/the-greatest-secret-in-investing/
I have 3 baskets with 9 eggs. I have 4 eggs in one basket, 3.85 eggs in another and 1.15 eggs in the third. One of my eggs (stocks) is split between 2 baskets. I do keep some cash in each basket as well. Usually 10-15% of my total portfolio. Some of my eggs are similar and I doubt Cramer would say I was diversified enough.
are all the eggs the same color? or are some green, yellow, and pink or maybe stripes? sorry couldn't help myself, silly easter reference, : )
I spread my eggs out over time, price, and underlying. Sometimes when the odds are great, I accumulate a large position as volatility (and premium) fades, as long as price action is not sending the wrong signal.
-long option buyer, pure leverage
-long option buyer, pure leverage
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