We are pleased to announce that a new and much-anticipated feature of Capitalist Exploits is now here.
Every Friday our “head” Trader, Brad Thomas will be answering readers questions. Questions about the markets, how to trade them, how to manage risk, the macro, the micro and much in between. If you have a question for Brad submit it here.
We get a lot of questions on all sorts of topics and we always feel bad when not responding. It’s not because the question isn’t a good one, or because we’re too good to speak to our readers. On the contrary we would love to respond to every question but we don’t sit around our computers answering queries all day.
Therefore, in the interests of engaging with you, our readers and answering your questions in a timely manner, we will be doing these Q&A sessions every Friday.
A good friend of mine recently asked the rhetorical question, “Why take advice from a broker who works against you not for you?” Indeed, why? Taking advice from someone who either has never been successful in trading themselves or, worse makes money when you trade and therefore is incentivized to have you “churn” your account, is unfortunately where most people end up.
Together with Brad we’ll share with you what we know, and where we don’t know the answer we’re sure we’ll learn it from one of our incredibly astute readers.
Brad is a true veteran of the financial markets, a professional trader who tells it like it is. So once again, if you have a question on trading the markets shoot it through here.
Over to Brad for this weeks Q&A…
Question:
The question below was related to a recent trade alert involving buying a long-dated put option.
“I’m not sure I understand this. Is there a stop on this trade?”
Answer:
Don’t confuse option buying, whether it be a put (right to sell) or call (right to buy) with futures or spot Forex trading, incidentally the two areas most retail traders lose their shirts in. Since this isn’t a spot trade or futures contract there are no stops – in effect the cost of the option is your “stop”. I like to think of cost of the option (the premium) as being the amount I would be willing to risk if I was to get stopped out on a leveraged FX or futures trade. If you are worried about losing the option premium then you probably have too many option contracts
Question:
“Hey Brad, your intuition is amazing, I’ve been following you from the beginning and my brokerage account is much happier for it. I have a question. You always mention a certain amount of capital to risk per trade. Usually 1%. How do you go about calculating this? Do you calculate this based on your portfolio value or on cash on hand?”
Answer:
How much to risk is based on the value of your portfolio at a point in time. I like to look at the value of my portfolio only once every 6 months. So if my portfolio value was $50k at the start of the year I would risk $500 per trade. If after 6 months it had gone up to $60k then I would risk $600 per trade. On the other hand if it went down to say $45k then I would only risk $450 per trade for the next 6 months. In this way you scale up and scale down as trades go for or against you. This is quite important from a risk management perspective because it ensures that you will never “blow-up” your account if the market goes against you for an extended period of time.
Question:
“Hi Brad, Thanks for a great service. I’m a money manager myself and I’ve subscribed to quite a few “gurus” over the years and love the fact that your alerts are so very straight forward with zero fluff. True professionalism shines through with no hype. Thank you. My question is this. From the trades you’ve recommended for the last 6 months it’s evident you favour buying long-dated value plays and often out of the money. If you were to buy closer to the money options would this not reduce your risk and provide greater upside when your thesis plays out?”
Answer:
I have been favouring buying OTM options on value plays because in most cases implied volatility is so cheap. Furthermore, I think that many of these value plays have significant upside when they decide to move so I want to get as much gearing from my capital as I can. It won’t always be this way particularly when implied volatility starts to rise and I cannot find as many deep value situations.
– Brad
About Brad Thomas
Brad Thomas is the Editor of Capex Asymmetric Trader. Independently wealthy via his skill as a trader, Brad is a practical crowd “behavioralist”. First introduced to the stock market in 1985 by a school friend in New Zealand, he has been involved with trading ever since.
He was originally trained as an accountant and mathematician and holds a masters degree. Brad first started working on a commodities trading desk with a Japanese trading house. For 6 years he was mentored by a Japanese national on the art of beating the crowd through understanding crowd psychology and expressing views through the various trading tools. It was during this time Brad developed his own unique way of viewing and trading markets.
Brad then joined a multinational Merchant Bank and for 11 years managed a proprietary fund trading in equity options in both the US and Europe. Brad retired from “corporate trading” in 2007 to manage his own funds and to spend a little more time on having fun outside of beating the crowd.
Brad specializes in looking for deep value situations across asset classes in different countries where dramatic returns can be achieve from relatively little risk.
Until next week.
– Chris
