Portfolio Considerations of a Trading Strategy (Part 6)

In the last post I left off by planning for the cash position ($12,000) along with the iron condor position ($8,000). This makes for multiple simultaneous positions. I can imagine a trading group discussing this. However, other portfolio considerations must be made to evaluate this trading strategy that probably are not appropriate for public discussion.

For example, I may not feel comfortable discussing the need to pay a $1,500 mortgage every month on top of $5,000 in living expenses. Suppose the backtest showed this position to average $150 profit per week, which is $7,800 per year. Am I comfortable increasing this position 10-fold to potentially make $78,000 per year? I would need $200,000 in the account for this purpose. This is a portfolio consideration.

Rather than scale up this particular position, perhaps I seek other trading strategies for diversification or hedging. How much can I expect to make from those strategies? How much cash do I need on the sidelines for those strategies? Am I able to fund all of them? These are portfolio considerations.

Zooming out even further, how much of my total net worth do I feel comfortable having in my trading account? Perhaps I only feel comfortable allocating 70% of my net worth to trading and the other 30% to bonds, real estate, etc. I should also probably have a small checking account readily liquid in case of emergency.

All the portfolio considerations described in the last three paragraphs are probably not appropriate for public disclosure because they involve matters of wealth. They certainly should be carefully thought through, however. Just how beneficial can a trading group be for the most-involved participants who trade for a living?

If all group members make a concerted effort then I think portfolio considerations can be discussed to some extent. If the common goal is trading for a living then these details affect everyone. One problem is that despite being the “elephant in the room,” in many instances portfolio considerations are not even acknowledged. Part of this is probably due to a second problem: discussion of trading strategies is much sexier than discussion of portfolio management.

I don’t know why. It just is.