It isn’t that often that I have anything meaningful to say that isn’t tethered to a chart, but I’d like to offer a couple of items today. These sound silly, but they are meant as a serious attempt to be helpful. Here goes…….
Quantity Counts
Fifty options contracts is better than ten. Ten is better than five. And five is way better than one.
Seems obvious, right? But my point is that I’ve often found myself with very conservative positions (many months until expiration, very deeply in the money) and thus will wind up with a small quantity of contracts. They may do all right, but no matter how big the move, they’re not going to move the dial that much.
What I realized recently – – and I know this is a “duh” moment, but bear with me – – is that a large quantity of shorter-term, less-in-the-money contracts can move the dial in a big way. Of course, this is a two-edged sword, but the whack-on-the-side-of-the-head moment for me has come in the form of my XLU position, which has a very large number of contracts and is really producing great results. So I’m starting to seriously shed my portfolio composition of pee-wee sized quantities.
Split Personalities Shed Light
I have two portfolios. One of them is my big portfolio, and it always has positions. The “lightest” it ever gets (that is to say, the most cash it ever has) is something like 30%. This portfolio is kind of the equivalent of money burning a hole in my pocket. I cannot seem to tolerate unused buying power.
My second portfolio is a smaller one. I am content to have it in 100% cash for almost all the time. On the rare occasion when I feel I’ve got something bordering on a sure thing, I dust it off and put it to work.
It turns out that my little portfolio almost always has winning trades. And it turns out that, in a year like that, my big portfolio gets the hell beaten out of it.
The lesson, it seems to me, is that cash is most certainly a position, and being OUT of the market most of the time is absolutely a-OK. This lesson can’t seem to seep its way into my thick skull, but in a curious way, when I find myself actually making a trade with my small account, I feel confident that things are most assuredly about to turn my way (I’ll break the tension and state that, yes, I started trading this account just a few trading days ago for the first time in months).
So there you have it. I’m a dunce, I realize, but these two little facts will maybe be helpful.
