The purpose of this virtual portfolio is to show that anyone can make money consistently by following some very basic rules without trying to guess market direction. Our focus is on discipline and money management rather than entries. Our goal is to show that by keeping losses very small and letting run our winners it is easy to be profitable in the long-run.
– Most of the trades are directional, naked options, no spreads (or very rarely).
– This virtual portfolio is targeted to trades that we usually hold between 2-3 days and a couple of weeks.
– All trades are posted live in the virtual portfolio as soon as they are entered and most of the time in comments as well.
– We use different strategies in this virtual portfolio, one of them being the 5MA strategy (explained in another post). But we do not trade this strategy only. Most of our trades are based on technicals, support/resistance, patterns, etc. The constant is that we always define our stop when we enter the trade and we always respect risk management and position sizing.
– For most positions, unless indicated, we buy ATM or slightly ITM naked calls or puts. We usually buy one month out, and never hold current month options 2 weeks before expiration.
– R is how much we risk on each position. It is the difference between the entry price and the stop.
– R should not be more than 2% or 3% of your virtual portfolio.
– R is constant. It means that we should always lose the same amount when our stop is hit. If we risk 2% of your virtual portfolio on each trade and our virtual portfolio is $100K, then we should ALWAYS lose $2k when we get stopped-out. And it does not matter if the stock dropped 20% or 1% from our entry.
– By defining our stop and our risk BEFORE we enter each trade, we can then calculate the number of contracts we need to buy to keep our loss at 1R when we get stopped-out.
An example of how we calculate position size:
Let’s say we buy AAPL calls when AAPL is at $152.25.
$151 is our stop.
Delta of the May $155’s is 0.50
Our total account is $25,000
Our risk on this trade is 2% of $25,000 or $500
Our risk is $1.25 on the stock
Our risk or maximum loss per option is $0.625, which 0.5 (delta) X $1.25 (risk on stock).
The number of contracts we should buy is our total risk divided by the risk per option: $500/(0.625*100) = 8
The virtual portfolio can be found here: http://www.philstockworld.com/2008/04/10/new-test/
