6 Q&A from the June 19th Webinar
Q: Where can I get detailed information on the 1% Rule?
A: The 1% Rule is Point #4 in the The Market Guys’ Five Points for Trading Success. Specifically, refer to Chapter 12 which deals with applying the 1% Rule to your risk management plan.
Q: With The Options Oracle, will it be suitable for a trader that only have level 2 option level approved on his or her account?
A: With an E*Trade Level 2 account, you will be able to execute some of the trades, but it is recommended that you apply for Level 3 for full participation.
Q: Is your radio show available online?
A: You bet! Just click on the Podcast tab above!
Q: What’s wrong with taking a bit more risk by allocating more than 20 percent to stocks?
A: We suggest allocating no more than about 20% of your portfolio to active trading. You may allocate more than 20% to stocks overall. There are a number of factors that will affect your overall portfolio allocation including risk tolerance, goals, how long before you need the money and current income. Remember the point we made in the webinar: every reward comes with its own attendant risks. Your responsibility is to manage the risks as best as possible.
Q: If you’re only trading 20% of your money, where do you have the other 80%?
A: That will be unique for each individual but it may include index funds, real estate (both direct and securitized, such as REITs), cash or cash equivalents, fixed income and commodities or precious metals. You should consult a financial planner to assist you in your overall allocation for your specific needs.
6 Responses to “Q&A from the June 19th Webinar”
Hello webmasterEvery other blog I have read about Index Funds, has been lacking in information. Your insight into Index Funds is sooooo much better than anything else I have read. Thanks Amanda.
Hi guys,
Great job and love the blog. Further to the 1% rule and looking at your TOO Trade Alert 062608, you are advising to buy a Jan 140 2010 (Ticker: LXWAX) Calls but exit position should the stock close below 113, I understand the logic behind setting your price just slightly below support; however, this seems to contradict the 1% rule you are advocating. According to my calculation it’s 19% and not 1% [(140-113)/140]. Am I thinking correctly here?
Thanks much in advance,
Mike
Please don’t forget that we are not calculating our 1% loss on the price of the option or the stock, we are calculating our 1% based on the value of our trading account. Example. If I have a $100,000 trading account then 1% of that amount is $1000. If I buy one option contract, whatever the price, I can allow that option to drop $10 before I lose my $1000. If I buy 2 option contracts I can allow that option to drop $5 before it’s time to get out. If you have bough 50 option contracts you would have gotten yourself in trouble. This 1% rule also helps us to properly “size” the position. This is an excellent question and I hope everyone reading this understands the importance of understanding how the 1% rule works for managing risk.
Sorry to keep coming back to you on this one. So in the context of the above scenario, assuming the $100,000trading account, I would be exit the position at $130 and not at $113?
Mike,
It depends on how may contract you are trading.
Let’s use shares as an example instead of the option contracts to make it easier to understand.
If I buy 1000 shares of a $40 stock and I have 100,000 in my trading account how far down can I let the price of the stock drop before I lose 1% of my account value ($1000)? The answer is: $1
But how can I allow for more of a down turn in the stock without risking more than 1% of my trading account? The answer is: Buy less shares
So, the question you now have to answer before you buy any shares or any option contract is….If I am using this 1% rule correctly, how many shares should I buy based on how much I am willing to let the stock drop.
Take out your calculator and start punching in the numbers, Use different share prices as an exercise to get some practice at this then try plugging in different stop prices to see just how far you can let the stock drop by adjusting the number of shares in your hypothetical position.
Thank you so much, AJ! This is so much more clear to me now. Have a great day!
Leave a Reply