Best Practices

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Portfolio Beta Weighting

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We know that not all deltas are alike so when we created the thinkorswim platform we created portfolio beta weighting and you can learn what that means and how to best use it right here. All premium sellers can benefit from this.

A table of 3 different strategies in AAPL, DIA and TWTR were displayed. The table included the position and the individual delta on each strategy.

We have a total delta across all three positions of -17. That though does not give us our market risk. Beta weighting against an index gives us that. By weighting against SPY, our beta weighted delta is -31; a +$1 move in SPY will (in theory) change our account by -$31.

A second table of the same 3 strategies in AAPL, DIA and TWTR beta weighted against the SPY (S&P 500 ETF) were displayed. The table included the position, individual delta and SPY beta weighted delta on each strategy.

We need to examine the correlation between our individual positions and the SPY (because how it is calculated) to see how much or little emphasis we place on it. A 1-month correlation of AAPL, DIA and TWTR with the SPY was displayed. The correlation showed that AAPL and DIA had a high correlation but TWTR had a low correlation. See “What is Beta?” on Skinny on Options Data Science on July 29, 2015 for more information. A low correlation indicates that we should use the underlying to hedge and not use the SPY.

An example of the new TOS watchlist which now shows the correlation of individual stocks to the SPY was displayed and it was explained how to access this feature. The example also showed how to change the parameters to change to different indexes as well as how to change the parameters to a 1-month (i.e. 22 business days = 1 month).

Watch this segment of “Best Practices” with Tom Preston and Tony Battista for the takeaways and other important information on portfolio beta weighting and how to use this to improve your trading.

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