Investing Strategies for Smaller Accounts: Adjusting Delta, Duration, & Risk.

Thomas rebec my friend tasty bites yes do you want to do a disclosure I am so for those of you that other your mom first I mean that's the problem this show I talked surgery and my mom gets freaked out no mom it's my eyes yes it's elective surgery yes yes we can't see the boy right in the head this is an email I'm just gonna read off an email from our development team to Bob subscribers just so you know what's going on Jeep classes on make sure Gmail is having problems this morning and it's impacting our ability to get emails in Bob or op so just so you know so we're just happy so some people are having some issues because Gmail but you haven't had any problems okay and a lot of people haven't had any issues but it's just an FYI because we were receiving a bunch of support emails so we'll mention on the show kind of what we're doing mm-hm and just to throw a little in case you have in case you are Bob subscriber and you haven't seen anything yet this morning all we've done this morning is closing trades and we bought back a bunch of SPS 59 58 56 I 56 and a half there's some odd numbers in there but 56 and a half 58 a quarter 59 a quarter and those are all closing trades from futures that we sold yesterday we've also bought back some euro 130 123 that's it so I bought back a couple of Euro contracts and as well as a bunch of S&P contracts and I don't put quantity on there anyway and then we've only made closing orders yes we've only done closing orders no opening orders yet today and we're gonna be doing a bunch of stuff on the opening which will probably be around some of the earnings plays last night specifically Yahoo Yahoo's trading down about 40 cents so we're short some cuts puts we're short of some calls we'll do some stuff in there and then and then kind of start the day so we do every day it's so much fun and I'm sure when Gmail comes back up which will be sooner than later everything will be fine all right it is 8:05 it's Wednesday April 17th we have a packed show today including David the ex trader who is now 8 for 8 after we took his lady's position off to days ago and he has crossed the $2,000 profit just yeah sure mm-hmm trust me yes you're right okay and I'm always right 22:35 and which is great because that keeps his I didn't realize that was that good it's really what it comes down to I didn't think I had it in me but some people say that good other people say that bad whatever it is we also have tasty bites coming up now and we have just a bunch of I think the market major segments today you're gonna love - it's a continuation of the pair's segment but it's starting to get aggressive with alternative stuff so and an awesome bootstrapper in the house somebody that I've wanted to talk to you for a long time cuz I love that business mmm the pawnshop business I know so my alley we've got a ton of stuff as well as a market S&P is down 11:00 this morning Nasdaq is down 22 so um games games are on game on game on mm-hmm tasty bites fired up Linda tasty bites is a discussion that we have weekly on Wednesdays and we talk about smaller smaller accounts I don't know how to and we do a bunch of shows on small accounts I do this show with case every day her accounts $2,500 account so that's a small account we talk about that we also do this on tasty bites once a week I thought today we'd cover position modifications for smaller accounts because I realized when I did where do I start with case yesterday how how much trouble she had just kind of getting through some of the adjustments like the whole idea of trying to do some type of risk or position modification - changes the whole game for everybody she had an earnings play on and in she had an she had a non nurse place she had a position on in Yahoo which became an earnings play yesterday and for small accounts sometimes it can become very cost prohibitive for taking positions off just prior to earning some you might want to make an adjustment rather than closing out a whole position so I thought what was interesting is I tried to get her to see that there's other choices you can do let's get let's go through this now it's called position modifications for smaller accounts tasty bites by the ways accounts from $2,000 which is the min them to have a margin account to as high as let's say 25 thousand which is the threshold threshold for for pattern day trading accounts anything over 25,000 there's no such thing as pattern date trading anything under 25 silly rule but it's a silly rule that was put in place in the late 90s that should have been eliminated years and years ago because it's a disincentive to be successful but unfortunately from a regulatory side we haven't fear that yet it's not because the regulators aren't smart let's not let's not confuse that it's because what we're teaching here today and what we're discussing every single day is a new is an alternative way to invest if this is a logic driven trade small trade often as a post the old approach which is don't trade often because you'll turn yourself up that's ridiculous because let's do it anyway if you don't trade off and you won't be successful it's not mathematically possible we believe in what we call the law of big averages just like everybody else when you do when you want to talk about the opportunity to be successful to reach whatever your goal is you have to achieve the average okay in order to set reasonable expectations you can't you can't hit you can't be right 60 percent of the time unless you create enough occurrences to be right 60 percent of time that's the law of big averages ok adjustments a and and again I'm gonna go through these quickly and then we'll try to use an example if we have enough time so making tweaking making adjustments to a position for smaller counts let's talk about the different ways we can do that first first we can move the strikes by doing vertical spreads to create more or less Delta another example I'm gonna stick with my own daughter just because to keep it to keep it's perfectly good something which is archived she was short the 24 puts in Yahoo yesterday verse short a hundred shares of stock it's a synthetic short call and but she's short the 24 puts if she wanted to reduce her risk to the exposure of earnings yesterday she could have done a vertical spread and sold the 25 puts and bought the 24 puts if she had sold one vertical spread in there she would have reduced her risk dramatically because the 25 puts had a lot more long Delta the short 25 puts a lot more long Delta than the short 24 puts so the easiest way to make an adjustment if you have a small account is to move the strikes by doing vertical spreads sell a higher strike put and buy back your short put that reduces your delta exposure again short stock and the same thing on the long side if you're long stock and you're short calls okay and you want to and you want to take a little less risk and because of an earnings play you can sell a call spread you sell the in the money call you sell you buy back here out of the money call or whatever it is you just sell a one strike wide or a two strike wide call spread and what that does is you maintain your long stock and you have more and you've reduced your risk by selling a deeper call the easiest way to do that is just by selling a vertical spread you sell the bigger option and you buy the smaller options it's the kind of the it's it's the opposite of we doing a credit spread but again you sell the bigger option you buy the smaller option what that does is it creates either more or less Delta depending on what you want to do against these because it puts sure that's right so the easiest way to make an adjustment going into a tweak and adjustment whatever it is going into an earnings play is to do it via a vertical spread the second way you can do something to make an adjustment to tweak your position is by moving the months you can go horizontal so what happens there is for example she wish she was short a May option if she really wanted to reduce her risk and extend her duration she would have moved her position out from May to June that will dramatically reduce your exposure because shorter term options are going to have they have a much tighter correlation with near-term price movement the longer the further out you can extend your duration the less correlation there is to two tick by tick prices smaller deltas so first thing you can do is go up or down using vertical spreads the second thing you can do Tony is you go out horizontal just by going to a different month and these are the easy strike same strike you can even move the strike diagonally if you want to he'll change your deltas even more you'll be even less delta less delta sensitive from four large accounts you have a lot more options with respect to being able to move move money in positions around for smaller accounts you have to be conscious of what the transactional and what the bid-ask differential and what the give up is to make those adjustments so you want to do things that have the least amount of theoretical give up and the smallest amount of transaction costs either going vertical or horizontal both they both serve purpose vertical changes your deltas and horizontal extend serration and then changes risk by again reducing the amount of delta correlation and see you could consider small odd lock strength stock transactions or stock adjustments if you have the capital available that's what case did yesterday and I really want to introduce it so I'm glad she did it but what she did yesterday was she thought that she had about 50 Delta's worth of risk so I suggested to her that for every 10 shares of stock she bought she would take off about approximately 20% of her risk so she ended up deciding and and by the way she was able to buy stock there was no problem it's just the message on the screen was wrong which I thought all along she was already short the stock why couldnt that's right always you can always cover position you could always make a position smaller that's right so so she bought back 20 shares of stock which took he bought another 10 yes she did she told me later on the way whaler office in the cab so she bought another 10 shares of stock so in net net in the end she ended up taking off 40% of her risk okay that's all she took out 40% of the risk it's okay it doesn't make any difference it's gonna be fine I know she's it's a vote of confidence thing it's the hole so she took off 40% of a risk bite by making a small odd lot stock adjustment if you have the capital available now you have to also have the right commission schedule to be able to do that so that you know because it's small but assuming that everything else is correct you can make a small odd lock stock adjustment and she still tried to figure out last night how she got 40% of a risk off by buying 20 shares and it's so funny because it was kind of it was interesting to watch her kind of trellis to it we're through the mass you struggle with the math but then at the end she was like okay I get it hmm I mean and and we take it for granted cuz that's all you've ever been doing of course so like you know if all you ever do is eat a hot dog it's easy too hot like you've never seen a hot dog before you're like what the hell is this that's it so so she's just looking at this thing going I don't really understand how this takes off 40% of my risk doesn't trust to believe anything we say so I mean you know okay because she's saying because the problem spot first on short a hundred shares so how does buying in 20 shares when I'm short a hundred shares check out 40% of my risk it should be 20% of my risk but the reality is because her deltas only 50 taking off 20 shares takes off 40% of the risk and D consider adding a short option or a short spread to make a minor risk adjustment if you have the available BP ARB which is the available buying power reduction er let's call it option buying powers I should have used hey Linda can you change that to not buying power reduction to option buying power please that should be option buying power so BPR is option buying power so if you have the option buying power available if you have it should say if you have yeah if the option buying power is available you should consider making a short option or a short spread to make a that that's a potential risk adjustment vehicle so Tony cuz I'm talking about cases account which has 2,500 hours what if you had 20,000 so 20,000 dollars available you know you want to make a small adjustment here instead of instead of having to buy stock back the play that I would prefer to do in there would have been to sell another put mm-hmm so she could have sold the 20 she has the 24 puts she's short she could have sold the 23 puts if she had the capital available and that would have done the same thing as buying 20 shares of stock at that moment at that moment it would created more short short potential yeah that's right so these are all part of the taste spice you go back for one second Linda I just want to review those and I'll go next thing so again small accounts that's the tasty bite segment these are the potential adjustments you can move the strikes by doing vertical spreads to create more or less Delta you can move the months by going horizontal to buy duration lower risk you can consider a small odd lot stock adjustments if you have the available capital and D you can considered add a short option or a short spread to make a minor risk adjustment if you have option buying power that is available and option buying power is always listed on the upper left hand side of your page if you have the available cash on a one day thing it's not a bad way to use it correct now let's go to the next piece which I call profits bat I like that you like product the sound of it right bat lots to things he likes profits and mirrors profits which by the way is true can I first start dating my wife scaly like you know what there's not a mirror you can't go by that you don't look at yourself everything with my son and she noticed my son did the same thing she goes oh my god you both the same the Apple did not fall very far from the tree hey cat just wrote in here he says a large gold star is hereby awarded to the bat for retrieving the word sensitive at the dark recesses of his male memory even it was - even if it was to describe delta's yes you would not be described you you're actually you are a little more sensitive than I ever realized my mom raised me right yeah um myself the prophets you ready yeah so when it comes to trading small I've been thinking about the whole idea of profits and one of the things that we do cuz we don't trade that small and we don't trade really small accounts that we don't trade very small we trade small size but we don't trade quote how people would define is small um so we have a tendencies all relative right I mean totally understand sure and so we have a tendency to take certain things for granted that smaller accounts can't do and I I don't know how to do anything different than be totally transparent and in what we do do so I don't think we can fake it and say okay this is something we would have done if we had a smaller account so I think the best thing we can do is continue to do what we're doing but have these discussions in smaller accounts I think I would consider taking profits a little quicker to reduce overall risk because you don't have the luxury of being as wrong I know this is gonna sound a little I think one of the keys to success when you're first building up small profits I think this goes for traders and when when you first started trading and I think it goes for everybody al myself the same thing we were much quicker to take profits hundred percent I mean you smell ten dollars you took it six thousand twenty-five cents I ran like a thief in the night okay and the reason for that the reason for that was number one you weren't that well capitalized right and and numbered you so the first thing is he's not well you're not well capitalized and the second thing is you're not you're not extraordinarily confident yet that is for sure thank you forwarding it that way I mean you were confident as some of your abilities but you know you weren't confident in all your trading abilities fair very fair okay and I think it's the same thing here we have a lot of retail customers with small accounts just starting out just learning to be a do-it-yourself investor learning how to be a self-directed investor and saying you know what I need to I need to move the needle forward that's all you have to do I need to prove concept I need to validate this so I'm gonna take my profits a little bit quicker that's gonna reduce my overall risk that's gonna let me put on more positions that's gonna give me the confidence I think that's a smart thing to do especially in smaller accounts I'm going to consider a minor stock or option adjustment to lock in some profits so we talked about this a second ago I was I was talking about case what she did yesterday was she had a position on which she was nervous about earnings so I suggested making a stock adjustment to take off some of her risk forget about risk now now let's talk about making a minor stock or option adjustment to lock in profits now she did have any profits lock yet no but in defense mode that's right and is a big difference between defense mode and locking in profits the other day we had a position on where we thought the more market did go down but yet we bought back part of our Russell butterfly because we were able to make a minor option adjustment to lock in profits correct that was at a call butterfly to the upside yes sometimes you can't truly lock in profits but you take problem this is what this is what most professional traders do so if for example Al was trading for a prop group like you know he's had done over the years and he was trading in there and he had he had the ability he let's say he was short a hundred deltas and he had the and the market was going down he would never buy in a hundred shares duck no but he may start to buy in ten shares of a crack at every number that he wants to buy it in Asher so he we call that the ability to he's lost prop or do whatever it is by making any kind of adjustment to your deltas and taking money off the table essentially what you're doing is you're locking in profits sir and the smaller the account most people have small accounts don't do that because let's just say you have one option you talked about this all the time I was this is how is ready to present this let's say you have a single option on Tony mmm and you're thinking I can't take I can't lock in my profits here I have a single option on but what I tried to teach case yesterday when I tried to talk about in passes you actually can you can make a stock adjustment against that position you can make an option adjustment against that position given the deltas you have some risk off the table well it may add additional form of risk but what it does at that moment is it takes a theoretical risk off the table once you learn that understand that man it's powerful tool smaller accounts have heightened concentration risk so to try and close one so every time you try and close one try to add another to one of the problems that most people make with small accounts that is they are taught they're focused on a single underlying or they have a high concentration of their risk in a single case was another perfect example she had a lot of a risk in mostly all of her losses of command Yahoo she's a high concentration of risk in a single stock and in order to move move on from that every time you close a different trade or something else try to open two trades mm-hmm try to diversify risks that you lose your concentration it's very hard I mean very hard it's very it's it's it's different when you're doing it for the first time it sounds common sense wise it's extremely difficult to do right and if you but you book the winner you don't want to put the money back out there if you had a loss you're thinking about I'm not going back out there it's very difficult every time I talk to her when she comes to do the show every day she goes I go listen let's put some more trades on your lesson I go let's put some more trades on she goes why are they putting more trades I'm not making money the trades I have on it's like you with your trainer you just want to watch him doing this so how do you go on that trip malign let me see you do the game I'm not so sure now how long he's down there for so what's 15 minutes really feel like why don't you do for a little while that kind of thing you don't ready to go on yeah I got it yeah let's is Rd Linda Kember perfect and finally consider an off setting put off setting but different position to lock in profits what that means is let's just say for example you had a position on in a long position on an apple I mean Apple was going up and you said to yourself you know what I kind of still I'm not ready to take this position off but I don't mind putting on a short position in Google I a better example would be you have a long position on in the queues and the market starts to go your way so the queues go up the spiders go up the Russell goes up all of a sudden you look in to see you know I'm not ready to take off my queue position yet but I'm gonna put a short position on in the Russell mm-hmm that is the coolest thing you can start to do because that's how you lock in profits you you have a winning position in one index and you put on a short position on another index and you give yourself a chance to kind of not only nestle next level right and I understand but we're talking about everything here again all these segments are archived and I think they're extremely valuable and I think if the more you go over them and the more you just kind of there's a lot of these they're designed to be all logical mm-hmm okay so every single step is a logic step and that's it yep that's all I got so we're gonna take a short break and come on back with opening Bell got a bunch of things to do here right here on the opening perfect we'll be back in 90 seconds got the opening bell you listen to get tasted on the tastytrade Network

Channel: tastytrade

Views: 58,792

Rating: 4.8920636 out of 5

Keywords: Investing Small Accounts, Tasty Bites, Small Brokerage Accounts, Delta, Duration, Risk Adjustment, Managing Investments, Investment Risk, Financial Network, Investment Education

Id: i92r8mrWlAs

Length: 21min 23sec (1283 seconds)

Published: Wed Apr 17 2013