Beta Weighting Your Portfolio

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I want to go over a very important video tutorial because it’s part of what we do to help manage our portfolio from month to month. And you’ll often hear me talk about it in a lot of the daily video updates that we do here on the membership side of our blog.

What we’re talking about here is portfolio Beta and helping to use Beta to understand where your portfolio might be tilted, if you’re tilted too bearish, too bullish, whatever the case is.

And I want to first reference a post that we did on the blog, on just the public blog a very long time ago. And it still holds true today. It’s been one of our top post that people read.

It’s been share billion times on Facebook and Twitter and Google, etcetera. And it's talking about Beta, and it has this chart here about S&P 500 and your stock or whatever stock that it is that you’re looking at.

Now remember, when we talk about Beta, (and we have video tutorials about that inside the membership section) we’re talking about the correlation of that given stock to the overall market.

In our case, we always like to correlate it to the S&P 500 because that is the market portfolio. It’s the benchmark portfolio that everyone uses to judge Beta, but you can obviously have Beta differences between stock A and stock B, whatever it is, Twitter and LinkedIn, Apple and Google, whatever the case is.

In our example today and in this video tutorial, what we only want to cover is portfolio Beta as it relates to the S&P 500 or SPX in your ticker symbol. Now if you remember, Beta is looking at where your stock is in correlation to the market.

A Beta of one means that your stock will move pretty much in lockstep with the S&P 500, so if the S&P 500 falls by 1%, your stock will fall by 1%, if the S&P 500 rises by 1%, your stock should rise by 1%.

And that Beta of 1 gives us an accurate reading of where we are in lockstep with the market. Now, when we start looking at positive Beta versus negative Beta, we start taking into account the fact that that stock may have moves that are greater than or in the opposite direction of the overall market move.

Now in this example above, we have your stock here and just whatever stock we use at the time. You can see that this has a much higher slope and trajectory than the S&P 500.

So this stock likely had this positive Beta feature, meaning that if the stock market moves up by 1%, this stock may move up by 1.5%, something like that.

It’s got a little bit more juice baked into it, but that also means that if the stock market moves down by 1% that this stock may also move down by 1.5%.

It works in both directions. Now, when we talk about negative Beta, that’s when we’re talking about stocks that move in the inverse of the S&P 500. For example, if the S&P 500 goes up by 1%, then this stock if it has a -1 Beta (so complete opposite of the S&P) will go down by 1%.

It goes in the opposite direction, so if you see something that has a negative Beta, that means that it’s moving in the inverse of the S&P 500.

That's really what we want to get through at least on this part of the video, and then I’m going to show you how to Beta weight your portfolio to the S&P and start looking at things that may be a little bit different in your portfolio as it relates to the overall market.

If you have trouble understanding Beta, we’ve got another video tutorial right inside the membership section. You can easily go through there and check it out.

Alright, here's a look at current positions that we have just at the time that I’m making this video. And you can see that we have all of my Deltas here and all of the profit loss and opens and everything.

This is everything we haven’t closed out for the month just yet. And I have it all, just put into different categories that I use and most of you have seen this before. If you’re on my coaching program, you’ve seen this before because we go over it a lot.

But what you don't see is that you can go up here in the top right-hand corner of your Thinkorswim platform, and you see that right now, I’ve un-clicked Beta weighting.

And you can easily check this box right here and Beta weight the entire portfolio here, so that it’s actually taking into account the fact that what that stock is and how it relates to the S&P 500 or any other stock that you’re really following (we’re going to use SPX in our example) and Beta weight your entire portfolio to that index.

It’s a real easy way to get an idea of where you are because right now, we see Deltas that are all over the place where we’ve got positive Deltas, negative Deltas all over the place. We don't know exactly – Are we too bullish, too bearish?

Where is our portfolio tilted? And if you're in my coaching program, you know that we talk about this a lot, is making sure that you have a portfolio that’s fairly even.

You can be a little bit tilted bearish or a little bit tilted bullish, but what you don’t want to be is you don’t want to be too bearish or too bullish at any given time during the month because you don’t have enough positions on that are making money.

I’m going to check that box for Beta weight, and I’m just going to type in SPX. And you can see as soon as I typed in SPX up here in the top right-hand corner, then all of the Deltas below have now changed to Deltas that are more correlated with the market.

That takes into account what positions we have, whether it’s puts or calls or calendars or credit spreads or whatever the case is, and now correlates those Deltas, weighting them to the SPX. Now, we can go down here and see if we’re a little bit bearish, a little bit bullish on the overall market going forward.

And you can see that our total down here at the bottom is that we’re a little bit bullish on the overall market, so our Beta is about 1.40 right now at the time of this recording.

The market just opened up; this will change throughout the day as your position evolves and changes and your Deltas evolve and change as well. But right now, we’re about 1.4, so we're a little bit bullish on the market.

And because we've seen a little bit of dip in the market at the time that we’re recording this video, it’s obviously pretty match safe to assume that we’re just a little bit bullish on the market and that's okay. We can be a little bit bullish on the market going forward.

Some of the things I want to point out are things that don't necessarily correlate exactly with the market. You just have to take into account that some of your positions, although they might be stocks that go up, you might have a negative position in the market in that particular index.

You can see that we do have a position that we put on a while back in the SPY and that's pretty much the same mini alternative to the SPX. It’s a smaller ETF index that you can use in conjunction with the SPX to trade, and we have a call spread, so we were short a call spread in the market as the market started to fall.

Now it’s gone in the money a little bit (and that's okay) and you can that our adjusted Delta is -7, so every time that the market moves up, we’re losing a little bit of money on this trade because we want the market to go down.

It's very smart in the way that the system is setup at least on our broker platform to adjust not only for directional moves in the stock but also adjust for positional moves. You can see if you're too bearish, too bullish, whatever the case is.

Now, you can adjust this to anything you want. I’m just going to leave it down here at the bottom and watch this 140 figure at the bottom, and I’ll adjust it to the RUT.

Now, if we use the RUT or the Russell 2000 as our index, now you can see that we’re a little bit more changed on the subtotals for our Delta. We could even put in here something like Apple.

If you wanted to Beta weight to Apple, then this is where your position would be Beta weighted to Apple, etcetera. You can type in as many things as you want. I usually use SPX, and I don’t want to get over two here.

That's a big question that people always have is, “Kirk, where do you want your Beta to be?” And ideally, I don’t want to be over two in any direction, and that means that I'm just a little bit too more, I’m almost twice as bullish or twice as bearish in the market going forward than somebody else.

That's where I want to keep my Beta, and that’s how I manage my portfolio throughout the month. If I feel that I'm a little bit too bullish, maybe I’ll go in today and start adding some positions that are a little bit more bearish and help bring that Beta down and that Delta down to a more manageable level.

And that way, I know that I’m not getting too bullish or too bearish and it’s a very quick way to check yourself on the market so that you don’t let your emotions get the best of your as you start going through the month.

As always, I hope you guys enjoyed this video. This is a very quick video on understanding Beta and how it works for your portfolio. But with all these videos, even though they’re quick, I want them to be powerful, I want this to be super easy for you guys to understand.

If you have any questions at all or comments about this video or any videos, please go ahead and add them to the membership area of the blog and we’ll get all those questions answered for you guys right away. As always, happy trading!