This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Managing Your Options Portfolio

Many of the OptionsProfits reader questions I receive concern the broad area of managing their option positions. One of the key tenets of portfolio management is diversification. Simply stated, this means that no one position should be big enough to hurt you badly. So let us talk about some simple ways to manage a portfolio of 10, 20 or 40 option positions. I heartily recommend that you trade a larger number of small positions so that no one position can hurt you. On the other hand I recognize that some people cannot handle the logistics of 40 positions.

We will assume that the positions are in puts that we have written. I always recommend that anyone who writes options keeps cash in reserve of 20% of the portfolio in order to cover events such as option assignments.

1. 10 position portfolio of $100,000. First we take out the 20% portfolio reserve which leaves us $80,000 to invest. If we are in 10 positions then we can equally divide that into ten $8,000 trades. The trade size here is measured by the margin requirements. I also recommend that the individual option position always be no more than the amount of stock you would feel comfortable buying.

2. 20 position portfolio of $100,000. Again take out the $20,000 cash reserve leaving us with $80,000. But this time we are investing in 20 positions so our margin allocation to each is only $4,000 which is safer than the position sizes in the 10 stock portfolio above. If we lose 100% of our margin then it is only a 4% portfolio level hit.

3. 40 position portfolio of $100,000. We take out the $20,000 portfolio reserve leaving $80,000 for trading. Now when we take on 40 positions the individual trades can be reduced to $2,000 margin for each. This involves only half as much trade risk as for the 20 position portfolio and is clearly safer in the sense that no one position can hurt the portfolio too much.

Another factor to consider in deciding on the right portfolio size for you is your broker's commission schedule. Most brokers have a fixed or minimum fee that I will call a ticket charge and then a variable fee that increases for each option traded. To keep your commission expenses under control you want to trade in a size that gets you into the variable cost structure so that the ticket charge does not represent your average commission cost. You want to get your cost down close to the variable cost as your average commission. I have found that this means the optimal trade size is somewhere between 5 and 10 options as a minimum. It will obviously differ from broker to broker but the sweet spot is usually somewhere in that range.

If you have a smaller account you may want the account size to dictate the number of trades you have on at one time. Suppose we had a $50,000 account and the average option traded requires $500 in margin. After deducting our 20% cash reserve we have $40,000 available for trading and we want to maximize the number of positions, but make sure that we have at least five options in every average trade. That would mean we should target for $2,500 per trade ($500 X 5). If we divide $40,000 by $2,500 then we get 16 positions as a good number to shoot for.

This content brought to you by TheStreet's OptionsProfits. Click here for a 14-day free trial.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters