Monday, March 1, 2010

Portfolio limits

So I have to admit it is kind of hard to come up with limits for position size in dollars and risk in terms of your overall portfolio. I find it extra difficult when I already have positions on. I kind of feel like I have already thrown the dart and now I am drawing the bulls eye around where the dart landed. So I tried to ignore the positions that I currently have on when determining my limits. Here is what I came up with:

Max option position size: 10% of total portfolio

Max option position risk: 3% of total portfolio

Max stock position: 20% of total portfolio

Max stock Position risk: 3% of total portfolio

All of these limits will in the context of the current value of the portfolio at the time of the trade. And I do realize that there are going to be some instances beyond my control that could create a loss that would be more severe than my 3% limit (i.e gap down in market, past stop price). But I will deal with those circumstances as they arrive.

I also want to point out that these limits are in the context of a margin portfolio. So in the case that I sell naked puts for example it is that the exercise price minus the premium paid that I will use to measure the position size, rather the margin required. For example, a naked put sale of 5 puts on stock XYZ at the 7.50 strike trading for $1 would require $1,250 (5 x 20% x 7.5 + 1).

I currently have several holdings that exceed these limits. I am actually going to look to adjust them to get them more in line with the portfolio limits.


  1. Going forward I will include where the new position fits into the limits that I have set.

  2. As I have mentioned in an earlier post I have started setting price alerts for important levels relating to my positions. This helps me during the day so I don't feel so anxious about the position. It also allows me to participate more passively on an intra-day basis. Really lowers anxiety.

    Today I have decided that I will start putting orders out there for for my current positions that would relate to the profit targets I have set. That way if I am not watching I still have a chance of not missing a move that may have only occurred for a brief period intra-day.