Rant On Position Sizing with SCTY

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Position sizing: Tonight, rant, instead of a video. I will be going over all of our trades that we made on Wednesday, December 16th. Which is Fed Day? Let's get through some things. I have some notes here that I want to reference because I get a lot of emails. Right. Today, I think today was a learning experience for a lot of people.

I am not surprised by some of the action today. I've been through it. I've been through this before. We've had stocks that go against us. We've had Fed Days come and go. We've had crazy markets all the time.

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I'm not a rookie to markets like this. First. I think a lot of people got shaken today. Frankly, I'm glad that it happened, and that it was a wake-up call. Out of all the emails, I did today; I did over 160 different emails today back and forth with people. 17 people out of that 17 people had emails that sounded something like this- "Kirk, I'm in trouble. I messed up. I did my position too large.

I f-ed up. I screwed up. I was too anxious. I was too this; I was too this." Over-allocated the SolarCity position, even though I specifically mention all the time, not to do it, and the reasons why not to over allocate, and why you should always keep your position size small.

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I stress it until I'm blue in the face. Frankly, I'm glad it happened to those 17 people. Not because I want them to lose money, or I want bad things to happen to them. They need to learn that you can't over-allocate in any market situation. It just can't happen. You don't know when a SolarCity is going to happen.

You don't know when a US Steel, or a Chipotle or an Amazon is going to happen to your portfolio. It only takes a couple of these to blow you up. You don't know when they're going to happen. This is a prime example of why you should be trading small. In our case with SolarCity, even with where it is right now, which the margins, SolarCity has gone up for sure.

We have two naked, strangle, straddle combinations in there. We're only at about 3% of our overall portfolio that's allocated to SolarCity. Relatively speaking it's still a very small position. In fact, if we lost all the money that we have into the trade right now, we'd still be able to keep the lights on by more than enough and keep trading.

If you can't do that in your account, use this as an opportunity to learn how to correctly manage risk and price and position size yourself with your trades. That means that if you have a $5,000 or $10,000 account, you should be trading any strangles or straddles. You should be converting all of those into iron condors and iron butterflies.

You have to ... This is critically important that you have to be able to hold on to that position. I'll show you why here in a second. You've got to be able to hold onto positions through times like this, right, and you have to patient and persistent. It's the patient and persistent trader that always wins out.

It is always, I guarantee, it is always the person who throws up their hands and gives up exactly at this moment that ends up losing big. Long term. Okay. The second thing is- It will always come back around. The SolarCity always come back around, maybe.

I'll show you a couple of examples where it did almost the same move that it's doing right now and came all the way back around before expiration. Maybe not in this case, but the reality is that most positions that have exponential moves very quickly come back around. Its again, the trader that's able to withstand that type of move, that ends up profiting long term.

Remember that probability of touch is always double. There's always a chance that we're going to be holding a losing position twice as much as we're going to be losing on that position. Right. We're going to have trades that go against us. Half of those trades that are paper losses in the beginning turn back around and become wins.

It's just the nature of the beast. That's why you have to keep your positions kinda small. In our case today, the SolarCity, you can see, the stock jumped again today in a pretty big way. Right? And then rallied most of the day. Right?

And, pretty good move, from about 25 or so up to around 50, 55 or so, and almost all over the map and between. Right? Implied volatility varied very high. I'm here telling you, not a lot of people took the time to look back in time and say "hey, how many times has this happened?". Right?

A lot of people said, "Oh, this is different, this is different." Okay. Well, let's look back in time. Let's go back here to 2013 where SolarCity made a move from 20 below where it is up to 55, and then before the end of the expiration cycle was back down at 30. Okay. How does that happen? How does the stock then move so far so fast and is so, quote unquote, is so popular and this one's different?

How does it happen that time and not this time? Right? Not that it can't happen this time or it's going to be different this time. You can't tell me, with empirical evidence, even with just working on SolarCity, I could bring up a gazillion other trades that go like this. You can't tell me that it doesn't happen again, and again, and again, and again and again. Okay?

Here's another one. Here's another time. This is later in 2013; this is after it did that move again. It went from 30 up to 60. It doubled again. 30 to 60 and before the end of the month was done it was cut back to 45. Right? A huge move, almost the same parabolic that moves we see here again. Right?

It just happens over, and over, and over, and over again. It happened in reverse, where it moved from 90 back down to 50, then it jumped up, then it crashed back down again. It just happens over and over again. It's just what stocks do. You have to understand; you have to believe that markets are going to move like this.

Yes, sometimes they will be erratic, and the only way you can protect yourself from that erratic move is to keep your D. A. M. position size small. Keep your damn position size small, so that you can withstand that type of move. Don't be all cowboy, rodeo trader and try to make these large position sizes.

Try to get all this money out of the market quickly. There's a long-term game. It is not for the person who wants to be in this three months or two months or four months. You got to be invested in this. You got to believe in it. If you do, it's gonna work out, for sure. You just have to do it. Okay?

In today's case, going back to it. Sorry for the little rant. I think it's warranted. Today's a day where it's gonna shake some people up. For sure I have people that got shaken up by this. Unfortunately, in this case, we need a little bit of tough love, that's why I want to be here to provide to you.

In this case with SolarCity, today we did make an adjustment to the position early in the morning. We had the 30 puts which we originally sold for a couple of hundred dollars. We now added on top of that and closed out of the 30 puts; we resold the 42 puts early in the morning. We just basically moved up our PUT side to the 42s.

Now, this is just for our strangle. We still have our straddle at 42 that we added yesterday. We haven't touched that position yet, though we may touch it, depending on where SolarCity goes the rest of this week or next week. Right now, we haven't done anything with that straddle. We've got, basically, two short puts at 42, a short call at 42 and a short call at 36.

All that's in the portfolio so you guys can see it. With this credit now, that we added of $1.52, that brings our overall credit, for those of you who are tracking or need to be tracking in SolarCity, to 13.27 overall. Everything that we have as far as credits in SolarCity's $13.27.

That moves our break even point out $13 on either end from where our profit and loss diagram kind of sits right now. Kind of where the peak of that profit and loss diagram sits right now. As we look inside here and look at the payoff diagram, where we're left here with SolarCity ...

Let's just look at the single symbol. We're not going to look at any adjustments or simulations. Okay? Here's where we're at. We're basically at 42, that's where the peak of our payoff diagram is. We add in the $13 that we have there, that gets us out to around 50 or so. Right? Is that, 42, 42 and 13 ... 55, I'm sorry. Out to 55 on the break even side. Okay?

Now the stock ... I don't know why I said 50. It's 42 we add the $13 of overall credit that we've received, and this graph doesn't represent the true potential of what we have. It's only taking into account positions that are left; it doesn't take into account positions we've already closed for profit, of which there's two.

In this case, our break-even point is more closely lined with the 55 strike. Even though the stock is trading in here at, basically 53, we'd love to see the stock come down. If it stays right here and we get a lot of decay back in value left in these options, We stand to maybe turn a little bit of a profit here, okay?

That's basically where we're looking at. That's how you can kind of keep track of your credits and everything that you're making. In this case with SolarCity, it's far out here, and we're not going to do anything this year because I think it's erratic. I want to see if this thing is going to move or hold or what.

In most cases, SolarCity's come back down to our retraced about 50% of the move when it makes a move like this. I don't want to make too quick of an adjustment here and put ourselves in a really bad position. If we were to make an adjustment in the future, we would just keep rolling up our short puts. We have all of our short puts at 42 right now.

We would just keep rolling those up to 45 or 50 et cetera, and go start to get a little bit inverted. Try to get this payoff diagram just a little bit flatter. What I've done here is ... Let me just, this is all positions; I don't know why I did this. What I've done down below is I have a simulated position of rolling up the 42 puts up to the 55 strike. Okay.

Say we went from the 42s, we rolled it all the way up to the 55 when super inverted; we take in a big massive credit of about $500 on each of those. Another $1000 to be added to our credit. Now you can see it gives us, kind of points where we want the stock to close, between 42 and 55. Again, stocks right now are closed today at 53, 55.

We still have a lot of options available, no pun intended here. The only reason that we have the ability to maintain this position, getting back to my original rant, in the beginning, is that we kept our da-gon position size small. It's not going to kill me if this thing goes crazy. Right? Is it going to hurt? Sure.

Who wants to lose on a position like this? Nobody does. It's able to come back the next day and the day after that and the day after that and make more trades, that ends up winning out. Okay?

All right. Other trades that we got out of today, we closed out of ... Let me go down first. We closed out of our iron butterfly via just a short inside options, or inverted strikes here, at the 90 calls and 95 puts. This was a good trade. It was a cool trade because our hedge that we entered into and our adjustment in CSV or CVS ended up saving us a little bit for this trade.

As the stock rallied today, we're able to close this thing back out. After all the credits that we took in on both the original iron butterfly and the adjustment, we were able to close this out at $100 profit, little over $100 profit. This is a great example of how the adjustment helped us.

And basically, what we did has we adjusted it from the original 90 iron butterfly right around CVS. CVS at the time was trading, and we made the 90 strike iron butterfly as the stock rallied up higher, all we did was move up our put side, just our put side, to the 95 strike.

Again, that helped us take in a little bit of credit. It's the same type of technique that we're using in SolarCity. That extra credit gave us just enough room to turn a profit on this trade. In fact, almost the amount of the credit that we took in on the hedge, is what we ended up taking in as a profit on the trade.

Without that hedge and that credit that we added, this would not have been a profitable position, in the least for us. It was a good little trade to get out of. The last one we go out of today is TLT. This is our directional debit spread. We were playing bonds noticeably lower. We thought that as the Fed decision got closer, and the expectation of rising rates, which they did, that it would crush bonds.

It did almost the opposite. In fact, I don't even know why bonds rallied today. What the expectation is, even though interest rates are higher, bonds are also higher. Go figure, it's a crazy market, and that's what happens. We didn't get much out of these before the end of the day. In fact, if you would have gotten out of them closer towards the end of the day, versus about 3:30 when we got out of the.

We probably would have ended up with a bigger credit and smaller loss. We did take a 2.61 loss on this particular position. We were playing directionally bearish. We might, again, we might come back in and try play bonds a little lower. I think now that the feds raising rates you can see the volatility has cooled down a lot in bonds.

I think the path of least resistance, long term, is short or is to the downside. I want to play that move. Just how are we going to play it from here? With lower volatility. As always, if you guys enjoyed this video, I apologize for the rant if it hurt your feelings. If it helps you in some way, please let me know. I truly am doing this because I want people to understand how this works.

The best way that I know how to show you how it works is to do what we do here. Which is send you the exact trades that we do and then go over all of those trades ever single night? So that we can help you. If we're making money, if we're not making money. There's always something you can take out of it to help make you a better trader.

That's my mission, my goal in life. I stay up late to do these videos every night for you guys. I appreciate you guys listening til the end and until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.