After more than two months of trading and reading a lot of articles, watching many videos, and having become a bit wiser, it is time to update already the financial planning I set up.
Table of Contents
- Portfolio (Costs, Deposits, Withdrawals)
- Maximum Portfolio At Risk
- Average Maximum Risk Per Trade
- Probability of Profit (PoP)
- Average Profit Per Trade
- Stop Loss
- Trades Per Week
- To Be Regularly Updated
Portfolio (Costs, Deposits, Withdrawals)
I keep track of the amounts I deposit and withdraw and related fees, commissions, and other costs of transferring money between (European) and (American) accounts.
I started off with $6,000 and added close to $5,000 a few months later.
The main reason for this was that trading with a small account restricts me too much in selecting feasible plays. Also, if I look at my trading goals (to at one point earn $2,000 per month post-tax as additional income, and if I want to be realistic about the returns on options trading, I will have to add more cash to my account once in a while.
Maximum Portfolio At Risk
I started with 40% and have increased that now to 60%. But this is the absolute maximum. I need to have a cash buffer all the time to deal with reversals, huge changes in the market, stocks turning against me, etc.
I am also using portfolio allocation rules based on market sentiment and especially the VIX for determining how much of my portfolio I will allocate on short premium strategies.
I will do the same for defined versus undefined risk strategies, but given that my account is still small, I will stick mainly to defined options strategies.
Average Maximum Risk Per Trade
I have set myself a rule that I will not go beyond a maximum of 4% of Net Liq for new positions.
PORTFOLIO NET LIQ
To calculate your portfolio net liq, take the sum of your portfolio’s cash balance and the net liq of all of your positions. Your cash balance includes any credit received from short positions as well as any uninvested cash. On the other hand, if your cash balance is negative, then that means you are margining securities. It is not uncommon to see your cash balance greater than your portfolio net liq, especially when you are net short.
POSITION NET LIQ
Additionally, when a position net liq number is green, it generally is a long position, and it denotes how much cash can be generated from the position at the mid-price. When a position net liq number is red, it generally is a short position and denotes how much cash is needed to cover the position at the mid-price. When taking the sum of your position net liq, your total may be positive or negative.
I do this to limit my risk exposure, but foremost to follow as much as possible to ‘trade small, trade often’ principle (higher chance of success).
Keeping your position size small while maintaining a high number of occurrences to maintain a high probability of profit.
Probability of Profit (PoP)
By trading small and often, I increase the probability of making higher profits.
The PoP is the theoretical probability of an equity/etf position(s) making at least $0.01 on a trade.
I use the standard 70% PoP as my target entry rule for spreads. For iron condors, I allow myself to go lower but not under 50%.
I also use the ‘P50’ as a metric to gauge a possible trade probability of making 50% of max potential profit. Similar to the probability of profit, this number tends to have a higher likelihood of success. Both of these metrics are available on the tastyworks platform.
See also this video.
Average Profit Per Trade
As an exit rule, I use 60% as my target for profit per trade. This means that whatever happens, as soon as the position reaches 60% profit, I will close the position and take profit.
Doing this at 50% would actually be safer (and is advised by the Tastytrade and Tastyworks experts) but to reach my financial goals I need to be a bit more aggressive here.
The following positions are in the green but all are still well under the 60% profit threshold:
- AMZN: 10/54 = 18.5%
- CLF: 4/26 = 15%
- EWZ (Iron Condor): 6/82 = 15%
- FCX: 22/53 = 41.5%
- IWM: 32/120 = 26.7%
- QQQ (Iron Condor): 40/117 = 34%
- SP: 14/60 = 23%
Another way of cutting losses is setting a stop loss rule. I have now set that at 75% of the premium paid or received. This means that if I set up a short premium bull put spread for a $100 premium (credit when opened), I need to manage the position as soon as it reaches -$75 ‘P/L Open’ (= Credit at Open minus NetLiq).
The following positions are in the red but except for the EWZ Bull Put all are still under the 75% loss threshold (and I need to monitor the QQQ and RIOT positions):
- EWZ (Bull Put) : 118/102 = 116% (!!)
- FXI: 4/51 = 8%
- QQQ (Iron Condor) : 115/192 = 60%
- RIOT: 33/62 = 53%
Same as above, but now with positions visible:
Trades Per Week
For calculation purposes, I have added to the Excel sheet a formula to estimate how many trades I can make per week (based on maximum allocations and other criteria as defined above; so if I do smaller positions, I need in reality to add more).
I also use 4 weeks as the average duration per trade. This may be too high, but it is based on the standard 60-30 DTE (days-to-expiry) entry and 21-14 DTE exit rules I also use. Which I have averaged to 4 weeks (minimum = 11 and maximum 46 days = 57/2 = slightly over 28 days).
To Be Regularly Updated
I will regularly update this planning as soon as I get more insight into the actuals. This may result in either depositing more money to keep up with my financial goals or adjusting them and finding other say to make additional income.
Please leave a comment on the above. I would be happy to know