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Wednesday, January 9, 2013

The Greeks - Portfolio Management

I am just beginning to learn (really learn) about portfolio management, as opposed to just managing individual trades.  My tiny mind used to see the words "portfolio management" and think it was just another lesson chapter that any rational trader with organizational skills would already be doing.  So basically I ignored it, in total ignorance.

Couldn't have been more wrong.  I am beginning to notice how frequently I ignore these investment "buzz words" thinking that there's no meat there.  When instead I should be examining every buzz word for what it is that they're talking about, and how much of it I might not know!

Portfolio management is a MUCH bigger deal than I ever thought.  To really do it properly, it requires some knowledge of "correlations"  (another one of those words I'd be quick to dismiss).  

This means that you have to have a pretty good handle on the Greeks, in order to know how one underlying in your portfolio correlates (in Delta value) to others.  100 shares of Apple stock (100 Deltas) does not correlate to 100 shares of IBM, or 1 contract of Netflix.  Furthermore, indexes like TLT (bonds) and VIX (volatility) are fear indicators and could be considered negative delta when correlating them against your positive long positions (as an example.)  I'm just putting my toe in this water, so I'm probably not giving enough information here to teach anything, but I want to make you aware of what I was totally ignoring.

Managing your WHOLE portfolio as a unit, instead of managing individual trades means keeping the portfolio "balanced" in the way you want, either neutral or directionally.  And it also means that you need to have the ability to BETA WEIGHT your trades


Here is a good article on the subject:  What is Beta Weighting?

When you Beta weight an entire portfolio, you are combining all of your open positions (trades) into a single profit picture, by correlating them to an instrument of your choice (I use the SPY) making apples and oranges comparable to apples and apples.  This is done effortlessly on the Think or Swim platform, on the Positions page, just by adding the instrument you want.  It can be anything and the software will automatically convert the Greeks of all trades into CORRELATED Greek values.

Obviously if you are a beginner or intermediate trader, you may still be "foggy" about the Greeks and how they help you.  Long trades have positive Delta and negative Theta.  Short trades have negative Delta and positive Theta.  By looking at the beta weighted totals of your positions, you can see in an instant if your portfolio is largely Long or Short, or neutral.  When you look at the market trend, it can be useful to know if your trades are cumulatively representing your expectations.  Are you riding the horse in the direction he's going or are you bucking the trend?  If you're a contrarian, bucking the trend might be your choice.  But wouldn't it be nice to know how your portfolio is doing in toto??  You can actually trade the portfolio totals, instead of just trading one trade at a time, randomly.  Any professional trader always does.

As a seller of premium, I pretty much want my portfolio to tally to HIGH positive Theta (for fast decay)
and LOW positive Delta.  High Delta would conflict with my short strategies, making my shorts losers.

I guess there's two things I want to emphasize here.  You probably don't know enough about how to use
the Greeks, and you might not have a clue about portfolio management.   The internet is full of information (free) and Tasty Trade has four videos on the subject in their archives, so do yourself a favor and if you are at all like me, get your head out of the sand!  I know I've got my work cut out for me!

Happy Trading!


  1. Not all long trades have positive delta. For example, /ZB (30 yr bond futures) are inversely correlated to the SPY, so long positions have negative deltas and short positions have negative delta.
    Same with option positions. Short a put has positive delta, Short a call has negative delta. Hence the utility of beta weighting.

    A fellow tasty trader.


  2. Thank you, Tony. I didn't even think of the inverse options, but you're right, of course. Appreciate your comments,
    any time.