How many trades should be in your portfolio?

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• 0:00Speaker 00

  What's cracking, Ma? Thanks, everybody, for being here. My name's Michael Martin. Coming on from yesterday, I got another email that I'm kind of catching up on many of these, and it was a very sophisticated question. Simple question, but in the same time, very sophisticated, and that is, "Michael, what's the optimal number of positions that I should have in my portfolio at any given time?" Now, they didn't say long or short, but I don't think it actually matters, right? And so, for me, it's totally tied to my temperament and my personality.

• 0:40Speaker 00

  If the market is ripping in stocks, I'll tend to look at, you know, sector ETFs that can capture that basket, right? Normally, I'm not trying to find the best name. That's kind of ego-driven, and I know Paul Tudor Jones spoke about this in that interview that he did recently where he thinks in baskets. I think many pros kind of think that way, too, like, what are the four or five best names in an industry or the sector? And you kind of trade all of them because you don't really know. And you don't want to find yourself owning up something that could do very, very well and go up 10%, in which case you still make money, but there was another name in the sector that, for whatever reason, went up 15 or 20.

• 1:25Speaker 00

  So, pros kind of, you know, they create their spreadsheets, right? They have their basket. They can upload that, and then they could trade their own basket kind of long and then sell it long. That might be a lot for newer traders, but, you know, if you're going to trade, say, more than two or three names, you need to always think about, like, how do you adjust your protective stops then? Because that's a lot of babysitting, right? If it's like, if you're... And that's how I look at it. If you're trying to babysit one kid, no problem. It's just you and however old the kid is. Once you start getting into above three, now you've got four or five names, and they're all responding differently.

• 2:08Speaker 00

  And especially if you're a short-term trader, it's just a lot. So, the opportunity cost can become high because you might be focusing on, there might be something that has news, like, what's the catalyst? But there's something else that you might have missed, right? Because if you're a short-term trader, you might only be able to trade one or two things at the same time. I don't know. That'll really come from your own, developing your own experience. So, me, myself, I might have options, three, four, five positions on in options, but those are longer-term plays. I'm not really scalping or trading them. They're not weeklies, or I don't know. I'm not looking to try to make... There are some, you know, momentum strategies that I deploy once in a while, but I'm waiting for the models to kick in.

• 2:53Speaker 00

  I don't, I don't just put them on because I have hunches, you see? But most of the options trades are 90 to 120 days of expiration, days-to-expiration. So, I'm not getting crushed by theta decay, right? Which really happens at the knee of the chart. If you look at it, you know, you start really losing from 30 days in. I try to go out further so that, yes, I know theta's there, but it's not going to, it's not hitting me as hard per day as it would in the front. Then I start to think to roll, and, and then if I, you know, I use the time stops.

• 3:34Speaker 00

  If the market doesn't move enough within, say, 30 days or so, I usually don't sit and let them go to zero, even though I'm starting with small spots, like, very rarely will I have something on that's more than one-half of 1%. There's been a few times this year where I put on big trades because everything lined up, and I've seen these situations millions of times, right? I'm not new. And so, I don't really break the rules, but there's, there's times when you have to push. Case in point, I figured the ExxonMobil call options were underpriced back in January. And I, I kept looking, and I called my friends, and I said, "These things look like they're mispriced. Am I missing something here?

• 4:19Speaker 00

  What do you know? What do you hear?" You know, and I looked at all the news sources and Bloomberg and this and that, and so that warranted a 2% risk unit. When President Trump also put the tariffs on copper, and there was like a 10 standard deviation move, and the market was down 25%, I think, in a heartbeat, that retracement required a bigger, a bigger position. But it's not something that I'm doing every day just because I feel like it. You see what I'm saying? Like, those are very unique circumstances. Most of the time, I'm looking for asymmetry of, like I said, a five-to-one payoff, and I'm putting up a quarter point, maybe half a point.

• 4:59Speaker 00

  And if I do that across four, you know, four options, I have 1% risk portfolio heat. So, nothing. You know, and if one of them pays off, I'll still end up making money. So, so, so, it's not just the number of positions, it's how you're doing it. If you're in stocks or futures, right, you need protective stops. In some cases, you might even consider having sell limits above the market to liquidate you if you're using price targets or ranges of where it could become overbought, right?

• 5:35Speaker 00

  Like, if you find yourself in like, you know, like, recently, I was short NQ, as many of you were, and, you know, I'm going to bed with open live positions on. So, I have what we call OCO. One cancels the other. I have a protective buy stop above the market so that if some, if some good news comes out that I can't anticipate overnight, I'm not going to wake up to, you know, the market being up 700 points basis, the, the NQs, and get my face ripped off, right?

• 6:18Speaker 00

  So, I have protective stops, but I also have, like, if the market sells off and, and becomes oversold overnight, remember when I said, like, overnight, the liquidities might not be there? Not the same way that it is during the day, during normal trading hours, what we used to call the outcry session. I oftentimes put in a sell limit, a buy limit below the market so that if it trades at the limit, I'll get, I'll, I'll get liquidated from the trade, having made some money. OCO, one cancels the other. Like, so if this order gets filled, I don't, still want to have my buy stop above the market, especially if we're in a sell-off or a market that's in a downtrend, right?

• 7:02Speaker 00

  So, I try to, that, to me, is really what, what I do, is I manage a book of stop orders. I'm not trying to accumulate 40 positions. Some of my friends can do it, and it's just a lot. Like, they're very, very active. And for my temperament, and for my style, and for what I'm trying to do with my own money, I just find it a lot easier if I can handle things, you know, four, five, six kind of names. If options are employed, I can go a little bit higher in number, but those, that's because those are kind of surrogates for long stock positions or short stock. You know, I have puts, too. Mostly, I'm a debit buyer of calls and puts, outrides, directional trades.

• 7:46Speaker 00

  But the portfolio heat might be 2% of everything added up. So, it's not going to kill me if none of it works out, and I, I don't have to babysit those on a per-day basis because the way I look at it, and this isn't anything new probably to you, is that when you buy a, say, you buy a, buy a $2 call. It's 200 bucks, whatever commission you're paying. To me, you have a built-in stop by virtue of the debit balance, right? So, you're going, the most you could lose is 200. So, you position size accordingly. You know, now, you could also buy whatever, you know, you could buy three of, if your risk unit is 300, well, then it works out perfectly. You buy a 200.

• 8:30Speaker 00

  I mean, I hope I didn't, I don't remember what I just said. If your risk unit is 200 and you buy a $2 call, perfect. It fits perfectly. Some people who have a better feel can go out and buy, like, at that, five options at 200. And then if the debit balance decays down to eight, they just puke out the whole thing. So, it's the same risk. So, they trade it bigger, but they don't give it as much room, right? So, they could buy three at 600, and if it goes down a third, then they puke out all three. And they just stop themselves. And options traders, don't worry about the bid-ask. That's the least of your concerns. And once you're long, who cares what the offer is anyway? Your only concern is the bid, right?

• 9:14Speaker 00

  So, I think what happens is, over time, you start to develop a feel for what it is that you can handle and how much you want to manage. You know, I'm busy during the day. I have lots of other things going on in my life. Rather than sitting in front of a screen, I'd love to be able to do it more because this is a really good market for short-term traders, but I just don't have the time or the bandwidth right now for all the things that I'm working on to be sitting in front of the market. It would be great if I did, and it'd be great if I was on, you know, a trading desk. That would be fun. But at the end of the day, you know, life evolves the way it evolves. I'm a little bit older than probably many of you, so I'm doing in a way, and I've created an ecology and an ecosystem for me that works, right? So, I can have it all.

• 9:59Speaker 00

  And you're going to find that that's going to happen to you, too. Once you start having kids, early-morning trading is going to be hard because you're going to need a team of people to help you. So, I think it varies depending on the instrument and how active you want to be and what else is going on in your life. There isn't one particularly great answer. I don't want to mention their names because I feel like this might not be public information, but you kind of know who my friends are and who, who the options traders are. You know, some of them are carrying 100 to 150 positions, but that's all they do all day. And they have alerts set up, and they know exactly when to move, and they might even

• 10:38Speaker 00

  have stops and limits in to move inventory automatically if certain price points are hit, right? And that's, that's totally doable. You can use the technology. I wouldn't start that way. You can build up to it. But it really comes down to a feel for, like, what's best for you? What, how does that help you hit your financial goals? I tend to not have more, anywhere near having, like, say, 10 positions on, and that's mostly because most markets aren't necessarily trending. There's no reason to have positions on if markets are moving sideways. So, anyway, I hope that helps. If you haven't gotten your copy of the Inner Voice Trading audiobook, you can go to Trader Mindset and get that for free.

• 11:21Speaker 00

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