Portfolio Management: Setting Proper Goals (Ep. 1)

[Music] so welcome to our newest crash course how to build a portfolio in four easy steps my name is jim schultz and i am very happy that you are here with us today i'm gonna try to make this crash course as quick as concise and as worthwhile as i possibly can and what we're going to do in these four episodes is we are going to take a bird's-eye view of building your portfolio and guys i would argue this is more important than which strangle you're going to sell what stock you're going to trade or which earnings announcement you are interested in so yes this is gonna be a four episode crash course super quick and super to the point here is what we're going to do in episode number one this episode we are going to establish your portfolio goals in episode number two we're going to talk about the power of using indexes first in episode number three we're going to look to add individual stocks and then in episode number four we're going to talk about the day-to-day portfolio management so without further ado let's do it man let's dive right into episode number one establishing your portfolio goals okay so step one and this is mission critical this needs to happen before you place a single trade this needs to happen before you look to put on a single position you need to map out what do you want your target theta and target delta to be at the portfolio level in other words how valuable do you want time to be for you at the portfolio level and how valuable do you want direction to be for you at the portfolio level doing this man it will give you incredible guidance and clarity with your day-to-day decision making what you're quickly going to notice is that every decision you make the new trades the closing trades the position adjustments all these guys can be traced back into these overarching portfolio goals now we're going to talk about each of these targets in more detail in just a minute but let's take a look at your theta if your portfolio of theta is too low then you're going to be actively seeking significantly positive theta opportunities with your new traits this makes sense but what if your portfolio theta is too high which yes by the way this is a thing then you're going to be more cautious with adding more theta and instead you're gonna be looking for ways to reduce your theta exposure now what about your delta are you more bullish than you would like to be well then you'll look to add bearish positions or close bullish positions are you more bearish than you'd like to be then you'll do the opposite add bullish positions and close bearish positions and if you like your deltas well then you'll be looking for some more neutrally based positions those will be your go-to by determining your portfolio goals at the start like this and then using them as your guide you're able to reduce a ton of subjectivity in your analysis and remain far more objective all right so now let's turn our attention to theta in a little bit more detail and what we're going to do is we are going to look to target a percentage of net lick or net liquidating value in daily theta what this is going to do is it is going to add an incredible amount of context around what this number means and what it can do for us here is what i mean generally speaking we tend to fall in a range of 0.1 percent to 0.5 percent of our net lick in daily theta the number that you see at the very top of your tastyworks platform numbers on the lower end of this spectrum like 0.1 percent these are more conservative whereas numbers on the higher end of the spectrum like 0.4 or 0.5 these are going to be a lot more aggressive and the numbers in between of course like 0.2 or 0.3 percent these are kind of middle of the road to put these numbers into a portfolio context 0.1 percent on a 50 000 portfolio is 50 in daily theta whereas 0.5 percent on that same 50 000 portfolio would be 250 in daily theta on a 200 000 portfolio 0.1 percent would be 200 in daily theta zero point three percent would be six hundred dollars in daily theta and zero point five percent will be a whopping one thousand dollars in daily theta decay now that we've built a little bit of a foundation for our portfolio theta we can lean on the tasty trade research which has shown we can expect to capture about 25 percent of our daily theta this accounts for all the big winners all the big losers and everything in between what this is going to do is it is going to give us a great reference point for returns when it comes to our daily theta capture so assuming 360 days in a year to keep all the accountants happy a 0.1 percent in daily theta would be 36 percent for the entire year but we only expect to keep a quarter of that so we net out to a nine percent return not too shabby and you can clearly see that this number scales with more daily theta with 0.2 percent coming out to 18 a year and so on and so forth now some of you out there after having heard that you're kind of licking your chops you're like man this is some really really good stuff and rightfully so i mean positive theta and daily decay these are some powerful powerful allies but let's make sure that we all understand something these are just reference points these are just theoretical markers it's never going to be as simple as just putting on your half a percent in daily theta kicking your feet up on the desk collecting your 45 returns and then doubling your money every 18 months it's never going to work out that cleanly which is a perfect segue into our next topic and our next target delta so now that we have a theta foundation let's turn our attention to delta and the interesting thing about delta is there are effectively three different options that you can choose three different pathways forward through the forest if you will each of which with its own set of gimmies and gotchas so effectively the first thing you'll need to decide is what directional bias you want to have in the market you want to be bullish do you want to be bearish you want to be neutral again a strong case can be made for each of these the market wants to go higher over time and the positive drift in the geometric brownian motion asset pricing model effectively ensures that it will so for that reason alone you might want to be bullish but the big high velocity moves in the market usually happen to the downside and these moves generally coincide with expanding volatility so a short delta bearish portfolio can be a nice hedge against your short premium option positions and lastly you might want to remove direction entirely from your portfolio returns which a number of traders like to do and just be delta neutral you have to choose your own adventure here and any of the three can be successful over time so let's work through how to get started with each bias so if you want to be bullish then i think a great way to position your portfolio is relative to the spy index itself here's what i mean for instance with the sby currently around 450 dollars a share that means that 100 shares of spy is equivalent to about forty five thousand dollars that means that if you had a portfolio that was also equal to 45 000 then 100 beta weighted deltas at the portfolio level would be the same as 100 shares of spy thus you would have a one-to-one leverage in your portfolio relative to the index if however you had 200 beta weighted deltas in that same 45 000 portfolio then you are effectively controlling 200 shares of spy which has a notional value of 90 000 thus you have a two to one leverage in your portfolio relative to the index as another example let's say you had a one hundred and eighty thousand dollar portfolio here you have four times the notional value of 100 shares of sby so your starting point to have that same one-to-one leverage isn't 100 beta way to deltas or 45 000 that's only a quarter of your portfolio instead it's 400 beta weighted deltas which has a notional value of 180 thousand dollars the same value as your portfolio if instead you had 600 beta weighted deltas that would be a one and a half to one leverage ratio 800 beta weighted deltas would be a 2 1 leverage ratio and 1 000 beta weighted deltas would be a two and a half to one leverage ratio and so on all right so that's how to think about your portfolio deltas if you're bullish but what if you're bearish well it's going to play out a little differently let's have a look if you're bearish you could use the same leverage relationships that we established in the bullish context but it's probably even more helpful to think in terms of your delta to theta ratio remember guys a big reason that you are bearish in the first place is to protect your shore premium and your theta number is a representation of how much your premium you have so using a delta the theta ratio shows you just how much protection you need the key here is to lean on our tasty trade research and strive for a delta to theta ratio of about one to two so one short delta for every two positive theta this makes it pretty easy because you already know your portfolio theta numbers from the work we did just a few minutes ago so with that in hand you can easily figure out your short delta target for example if your daily theta target is 100 then you're looking for about 50 short deltas if your daily theta target is 500 then you're looking for about 250 short deltas and so on the great thing here is this already accounts for your portfolio size as that was included in the theta calculation itself so this ratio can be applied more quickly and universally okay so that's the bullish case and that's the bearish case but what about the neutral case well as luck would have it this guy is actually going to be the easiest of the three so let's have a look with delta neutrality it's pretty simple you want to keep your portfolio delta as close to zero as you possibly can now given the fact that we're retail traders and commissions and transaction costs begin to add up really quickly if we try to peg our portfolio delta to exactly zero we can just focus on keeping our portfolio delta within a range of neutrality anywhere between plus or minus 0.1 percent of net lick is close enough to zero that we can classify it as pretty delta neutral so for example on a ten thousand 000 portfolio that's going to be a range of plus or minus 10 deltas on a 50 000 portfolio that's going to be a range of plus or minus 50 deltas and so on if your deltas move outside of that range then you make the necessary adjustments with both your new trades and your existing positions to bring it back in line it's really that simple so there you have it guys that's how to establish your portfolio goals it's up to you to now decide how to take this information and apply it before i let you go let me give you a couple of points of guidance first you might naturally be wondering jim why didn't you include vega because when it comes to option returns there's three pieces there's theta there's delta and there's vega well theta and delta already cover so much ground that i'm not sure that you're going to derive any incremental benefit from tracking your portfolio of vega as well and not to mention now you also have another metric that you have to babysit you have another metric that you have to target and at a certain point that becomes significant right at a certain point there's too many cooks in the kitchen and it's difficult to move forward in any meaningful way so that's why you don't see vega included in this discussion second many of you out there especially you new traders out there my heart really goes out to you guys that are just starting out man it's like drinking from a fire hose i totally understand you're thinking jim i have no idea man i don't even know where to begin well here is a really great starting point and then you can adjust and customize later on first start with 0.1 percent of net lick in daily theta it's very conservative you can ramp this up later as you gain experience and you get more comfortable if you want a long portfolio bias which is totally up to you then start with a one-to-one leverage ratio in exactly the same manner as we went through how to figure that out if you want to be short then just target a one to two delta theta ratio these ideas these guide points they will give you a great foundation they will give you a great starting point for establishing these portfolio goals and then you can adjust and you can customize accordingly as you move forward along the learning curve and just like that guys we made it through episode number one establishing your portfolio goals if i can help you in any way guys you can always email me i'm just j schultz at tastytrade.com we can connect on twitter i'm just at j schultz f3 either way guys reach out to me with any questions any comments that you might have and i'm very very happy to help you in whatever way i possibly can whenever you are ready i will see you in episode number two of this crash course where we are going to talk about the power of indexes we'll see you there you

Channel: tastytrade

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Keywords: portfolio delta, portfolio theta, options portfolio, time decay, directional bias, portfolio management, portfolio manager, portfolio management definition, what is portfolio management in finance, portfolio management course, portfolio management process, how to manage an investment portfolio, investment and portfolio management, trading options, portfolio management explained, investing, investing course

Id: ud0ZnSbKNuw

Length: 15min 2sec (902 seconds)

Published: Sun Oct 10 2021