36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
418 Part IV: Additional Considerations
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With asset.s of $1 million, this means that $.5,000 would be committed to 30-day pur
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chases; $.5,000 to 90-day purchases; and $10,000 to 180-day purchases. This money
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would be reinvested in similar quantities at the end of each holding period.
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RISK ADJUSTMENT
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The subject of adjusting the ratio to constantly reflect 10% risk must be addressed at
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the end of each holding period. Although it is correct for the investor to keep his per
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centage commitments constant, he must not be deluded into automatically reinvest
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ing the same amount of dollars each time.
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Example: At the end of 30 days, the value of the entire portfolio, including potential
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option profits and losses, and interest earned, was down to $990,000. Then only ½ of
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1 % of that amount should be invested in the next 30-day purchase ($4,9.50).
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By operating in this manner - first computing the annualized risk and balanc
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ing it through predetermined percentage commitments to holding periods of various
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lengths; and second, readjusting the actual dollar commitment at the end of each
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holding period - the overall risk/reward ratios v,ill be kept close to the levels
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described in the earlier, simple desciiption of this strategy. This may require a rela
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tively large amount of work on the part of the strategist, but large portfolios usually
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do require work.
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The smaller investor does not have the luxury of such complete diversification,
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but he also does not have to adjust his total position as often.
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Example: An investor decided to commit $.50,000 to this strategy. Since there is a
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1,200% annualized risk in 30-day purchases, it does not make much sense to even
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consider purchases that are so short-term for assets of this size. Rather, he might
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decide to commit 1 % of his assets to a 90-day purchase and 3% to a 180-day pur
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chase. In dollar amounts, this would be $.500 in a 90-day option and $1,.500 in 180-
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day options. Admittedly, this does not leave much room for diversification, but to risk
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more in the short-term purchases would expose the investor to too much risk. In
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actual practice, this investor would probably just invest .5% of his assets in 180-day
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purchases, also a 10% annualized risk. This would mean that he could operate with
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only one option buyer's analysis (the 180-day one) and could place $2,.500 into selec
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tions from that list.
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His adjustments of the assets committed to option purchases could not be done
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as frequently as the large investor, because of the commissions involved. He certain
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ly would have to adjust every 180 days, but might prefer to do so more frequently -
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perhaps every 90 days - to be able to space his 180-day commitments over different |