How to Build a Portfolio in Four Easy Steps

Introduction

• Presenter: Jim Schultz
• Objective: Teach important concepts for building a successful trading portfolio.
• Focus Areas: Portfolio Delta, Portfolio Theta, and daily management.

Episode Overview

1. Episode 1: Establishing Portfolio Goals
2. Episode 2: The Power of Using Indexes First
3. Episode 3: Adding Individual Stocks
4. Episode 4: Day-to-Day Portfolio Management

Episode 1: Establishing Portfolio Goals

Key Concepts

• Portfolio Delta & Theta: Fundamental to day-to-day decision-making.
• Importance of Setting Goals: Guides trading decisions and reduces subjectivity.

Portfolio Theta

• Target Daily Theta: 0.1% to 0.5% of net liquidation value.
  • Lower end (0.1%) is conservative.
  • Higher end (0.4%-0.5%) is aggressive.
• Return Expectation: Capture ~25% of daily Theta.
  • Example: 9% annual return from 0.1% daily Theta.

Portfolio Delta

• Directional Bias: Decide on bullish, bearish, or neutral.
  • Bullish: Leverage portfolios relative to SPY index.
  • Bearish: Maintain Delta to Theta ratio of 1:2.
  • Neutral: Keep portfolio Delta close to zero.

Episode 2: The Power of Using Indexes

Benefits

• Smoother Ride: Limits exposure to systematic risk rather than unsystematic risk.
• Market Risk vs. Single Stock Risk: Market risk impacts all stocks, while single stock risk is specific.

Index Levels

1. Major Equity Indexes: SPY, QQQ, IWM, DIA
2. Non-equity Indexes: GLD, TLT, USO, SLV
3. International/Sector Indexes: EWZ, FXI, XLE, XLU

Episode 3: Adding Individual Stocks

Implied Volatility Rank (IVR)

• Higher IVR: Indicates higher option prices, beneficial for premium sellers.
• Importance of volatility mean-reversion.

Finding Opportunities

• Resources: Pre-populated watchlists, earnings seasons.

Episode 4: Day-to-Day Management

Focus

• Problem Identification: Differentiate between position-level and portfolio-level issues.

Position-Level Management

• Defined Risk Strategies: Hands-off, let probabilities work.
• Undefined Risk Strategies: Require more active management.

Portfolio-Level Adjustments

• Align portfolio with established goals.
• New Trades: Add or adjust based on needed Delta or Theta.

Final Tips

• Don't Over-focus: Minor deviations in daily targets are acceptable.
• Achieve Immediate Adjustments: Correct individual positions promptly.

Conclusion

• Goal: Equip traders with a framework for successful portfolio management.
• Next Steps: Apply concepts to personal trading strategies.
• Future Learning: Stay tuned for upcoming courses.