Back in 2015 I created this options training called Remora Options (like the fish) - it was really basic but that was the point. One of the things I tried to talk about in that training was this idea of managing single trade risk and maximizing the gains on a position so that you:
a) Trade less
b) Made more
The discussions yesterday had me thinking this morning as I was on a run here in St. Thomas and it brought back this training and what I was advocating for then, for the newer/non-consistent traders. There is a video from 2015 that was pretty much similar to what I am explaining to you now that I still had - you can watch it here.
What I am going to talk about in this post is trade structure but at a level above just taking a trade and scaling out, which is pretty simple to do once you just understand why that might be of benefit.
I am going to explain part of the Top Down Process - from developing a trade idea to expressing that idea. Too often does this part of the investment equation get ignored especially in the retail education space - it’s an important part when you run money or when you get to the point where you’re just making money doing this and you try to get creative on how to extract more.
Trade Structure
The easiest way to express a trade idea is through just buying the shares, it’s the most direct way to take a trade idea and execute on it. Simple enough right? In some instances however you have to get creative with the structure if you want to maximize P&L and reduce overall portfolio and trade risk.
Here is a real example - Alibaba is a stock that has a $25B share buyback, it’s massive but the stock is not trading well and it gaps up and down all the time making the idea of holding short-term options and shares really hard to do unless you’re strapped in for a longer-term investment - which some are.
I know, or at least I think I do, that this name can run eventually and with that share buyback it’s hard to ignore that it is just going to sit flat but I also am aware of the trading risk this stock has.
This is where structure comes into play.
Everyone talks about “risk management” and that talk is usually based around “R multiples (very generic) and stops. That’s not risk management, that’s retail education regurgitated where nobody has really thought it out. Again, not saying I have all the answers, but I’ve been in this game and managed risk at larger amounts (still do) so these are though exercises you go through.
With BABA - the structure, for me, is better expressed with DITM and OTM calls that are out in time. Not big in size but enough to make a difference. I don’t want to own the equity because I have better long/short ideas to allocate too but the stock should have a spot in the overall portfolio even with call exposure that is small so that it adds to overall gains.
That’s how I see structure in this instance.
Is that subjective? Yes it is. But trading and portfolio management in my view needs to be subjective and qualitative meaning that each situation/scenario is assessed differently.
That's a slide from my pitch-deck, some of you have seen this, but that is the literal process to developing a trade idea. Before all of that happens a process of understanding how to structure it goes into place from the expression to the risk in the portfolio (size of position) so that you - maximize the P&L and manage overall portfolio/account risk.
If you’re a day trader reading this you can break this down to that framework as well (see that video above from 2015) - you’re just managing trade structure a different way (scaling out of the trade).
If you’re a futures trader reading this then you can break this down from understanding what type of day it will be (sideways, trend, sledge hammer short) and then structure your size on that trade accordingly.
The point is, trade structure, regardless if it’s money management with long/short equities, day trading options or futures is a big part of the equation in this game. It’s NOT enough to have trade idea and just execute on it with a half-assed approach, you have to maximize gains and manage the risk, especially for those of you readers who are hanging portfolios of larger capital.
I am going to discuss a few more examples in the premium section for members and continue this discussion….
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