arthur Guest
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Posted: Sat Jun 04, 2005 8:37 am Post subject: Managing Large Portfolios III |
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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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