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Managing Large Portfolios III

 
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arthur
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PostPosted: Sat Jun 04, 2005 8:37 am    Post subject: Managing Large Portfolios III Reply with quote

Both the bond and stock markets surged last week, with little volatility, and both markets fell sharply after strong opens Fri. My portfolio fell from $1.95 million three weeks ago to below $600,000 Fri morning, and closed at $950,000 Fri.

If the markets stayed high for another day, over the weekend, my portfolio would have closed below $500,000 Fri, because I had heavy positions in next month out-of-the money puts. I could have made larger gains Fri on the steep sell-off (with the benefit of hindsight). However, I was satisfied moving my portfolio into a much safer position, to make future gains.

In 2004, when the semiconductors were in a downtrend and fell greater than I expected, I lost about 40% of my portfolio, within a few weeks. This year was even worse, since I lost over 70% of my portfolio within three weeks.

Most of my gains, made in about a year, are lost within a few weeks each year. Therefore I created the "Golden Rule of Option Trading," which puts a stop loss on my whole portfolio, and may reduce or prevent big losses next time. The rule is: "If your option portfolio loses over 10% of its value within a week, then move your portfolio 100% into cash, and don't trade for a week."
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