Top Dogs: Managing a Small Account

Small Accounts | The Core Portfolio (1 of 6)

Top Dogs: Managing a Small Account

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

Viewers loved our Top Dogs series on creating and managing a portfolio for larger sized accounts but not everyone has that kind of trading capital so we worked hard to present this series which will focus on smaller accounts, and specifically, a $50K IRA account today. Small traders and large traders can both benefit from these shows.

It’s not the SEC but IRA Trustees which limit what IRA accounts can do in the options world. That means no short naked calls, naked puts must be cash secured and one cannot be short calendar trades since longer dated options must cover shorter dated ones.

A table of the 1-month correlations of the SPY (S&P 500 ETF). IWM (Russell 2000 ETF), QQQ (Nasdaq ETF) and TLT (20-Year Bond ETF) was displayed. The table showed the varying risk profiles on them. An example of a stock portfolio in the SPY was displayed. The example included the underlying, quantity, capital, commission, and beta weighted delta. The SPY portfolio meant zero diversification.

Examples of different portfolios using the above mentioned ETFs were displayed. The examples included the underlying, quantity, capital, commission, and beta weighted delta. Slight adjustments were made to the portfolio and derivatives were used in the form of short calls against long stock. The slight change in portfolio makeup and the addition of derivatives provided more flexibility and a lower beta weighting. By selling calls against our long stock we reduce risk.

Derivatives can be used as stock replacements. For each position, we can purchase 75 delta calls in the cycle two months out and sell 25 delta calls in the cycle one month out. When using options as stock replacement, we can gain similar exposure with much less capital. This gives us access to more underlying products and different strategies.

A sample portfolio with just options in the SPY, IWM and TLT was displayed. The portfolio used February/March diagonal spreads to create a synthetic covered call in each underlying. The sample included the underlying, position and capital required for each.

Watch this first segment of a planned six part series, “Top Dogs For Smaller Accounts” with Tom Sosnoff and Tony Battista, to see the details of how adding derivatives to our core long stock portfolio can drastically reduce directional risk and capital requirements.

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