Options Rules for the Risk-On Portfolio

Options can be a valuable way to hedge if used properly. They can also be used to goose returns by using call options and puts if you are going long or short respectively. On the other hand if used improperly they can be a wonderful way to quickly destroy your portfolio.

Here are my rules when it comes to buying options

1. Buy deep in the money (DITM) with a delta of 80 or better. All that means is that if the underlying asset moves 1 point the option should increase by about .80 cents.    
   
   1. For deep in the money high delta options time value will increase as intrinsic value decreases. This allows an investor to control risk and of course the option can only go to zero so you already know what your maximum loss will be when you buy the option. Now if the position had moved against me the option will decline in value slower than underlying asset.
      
2. Those buying out of the money (OTM) options by more than a dollar are generally buying lottery tickets.
   
   1. Most options expire worthless
      
3. Shorting or selling puts without a hedge creates huge percentage loss potential – don't do it. The risk/reward is far away from your favor.
   
   1. If you sell a put, the market has the right to make you buy those shares at the agreed upon strike price. Theoretically if the value of the underlying asset goes to 0, only the put sell amount was made. If you take the strike, and divide by zero, you get an infinite loss percentage.
      
4. Buy options with high open interest so when you make a transaction there is liquidity for that date/strike there will likely be someone ready to take the other side of the trade.
   
5. Do not buy options with market orders. It's likely you will get a price outside of what the bid/ask is showing.
   
6. Check prices for option dates even further out than what you are planning the move to take, since the price difference may be minimal and offer you more of a time window to see your view come to fruition.
   
7. If you want to take an equity position as a part of your portfolio, you can replace it with calls, but only buy the # of contracts at the strike that equals that equity position you would have taken.
   
   1. For example, If you wanted $50,000 in SPY, and the SPY strike is $50 with a price of $10, only buy 10 contracts, don't buy 50 contracts.
      

General Trading Rules

1. Always be a student of the market. 
1. This is the easiest of all rules, because the moment you think you are a master, the market will punch you in the mouth and remind you that you are just a student...
2. When grading your trading ability, measure yourself in absolute percentage terms and not absolute dollar value. It's tempting to measure yourself in relative value, but in a down market it won't pay your bills.
3. Always learn from a losing trade. It's like paying tuition; if you paid an "ivy league caliber tuition" with the trade, make sure you get an "ivy league caliber education" from it.
4. People rarely call/time a multi-sigma event, so stop trying to find them. But if one is staring you in the face, it could be a fantastic opportunity.
2. Don't do anything stupid
1. Never short a bull market.
2. Shorts and "selling puts" have infinite loss potential
3. Know your trading tools, how to use them, and what the rules of the market are...
3. Think in fundamentals and seek out truths, then hold tight to them.
1. When it comes to your view of the markets, take your position but be prepared to change your mind instantly when the new information presents itself. Retail traders try to find confirmation of their theory while professional traders are always on the look-out for an alternate view.
2. The general trend can not be reversed by manipulation, although it can be assisted or muted, so watch the powers that be...
4. Trading is psychological
1. ABC: Always Be Calm.
2. Never, ever, ever trade on emotion, although your "gut" is a valued member of the investment committee.
3. Never take a trade home with you - when you lose $10 million, go home and live like you made $100 million.
4. When Fat Bastard steals your mojo, go to your baseline position - which may be 100% cash or your "conservative" portfolio
5. Light commitments are advisable when market position is not certain. If you are unsure, but really think you should hop on a trade, open a position (it can even be a single share) so you can start to focus on it. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
5. Life is about taking risks, risk mitigation, & "pot-odds".
1. Trade only if you anticipate likely gains being a multiple of expected loss potential. In taking a position, price orders are allowable, not market orders. 
2. Never leave a trade without an automated sale ("stop") - period! 
3. Stops are to be used to protect profits & limit losses. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
4. Use a trading system that does not make your stop loss an open order visible to the markets since it will be used against you unless it violates any of the above rules.
5. In general, the most you can make shorting is 100%. When shorting, a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.
6. A portion of your holdings will be cash all the time
1. If you're 100% invested, think again because you're "all-in" and have little to no dry powder to take advantage of another great oppportunity.
7. Ride profits.
1. Stops are to be used to protect profits. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
2. In closing a position, use market orders.
8. Fundamentals, volume, and price volatility are as important as statistical reports.
9. Watch the herd
1. When in a state of low volume, watch and prepare to follow the price direction as volume increases.
2. acting immediately on a widespread public opinion even if correct, will usually delay the move.
3. Watch volume spikes for selling or buying, but also realize professionals hide their moves...
10. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

Mindfulness by living in the now

Training in mindfulness and mindfulness-based practices, oftentimes as part of a quiet meditation session, results in looking at experiences as if for the first time. Self-regulation of attention on the present by bringing one’s complete non-judgmental focus to the present experience on a moment-by-moment basis where each thought, feeling, or sensation that arises in the attentional field is acknowledged and accepted as it is. With practice, it will help one maintain an open and curious attitude and thinking in alternative categories. There is nothing inherently religious about mindfulness. By simply living in the now, we often gain a fresh perspective on how our habits, learning, and past experiences drive our present responses, and provides a more vibrant and holistic perception of reality.

From John Whalen-Bridge's The Emergence of Buddhist American Literature, "to a Buddhist, the mind is similar to a wild and drunken monkey, moving from one place to another with seemingly no purpose or direction; the thoughts that flow are transitory, chaotic, unregulated, and inevitably colored by desire. Since the meditator is detached by simply observing in a non-judgmental way to each thought, mindfulness welcomes the emergence of a succession of thoughts. Detachment from your thoughts frees you from the fate of a drunken monkey, and moves you one step closer to enlightenment.

There is nothing wrong with appropriately pursuing your desires either, and in fact being mindful of them often makes them even more enjoyable. Where one often needs mindfulness, is when the satiation of the desire becomes habitual and uncontrolled.

Another concept is that the untrained mind, being just another part of our body, is like an arm we have no control over. Do we let is stay connected to our body and just flail about, hitting and touching whatever it may, or do we have control over it? Can we place the arm's hand in our lap and sit quietly?

Using an extreme example, there is a story of buddha sitting in the woods during an extremely hot day. He was being bitten by bugs and scorched by the sun, and in doing so, was seeking to disconnect his mind from his body and perceive even the most annoying sensations into his body without judgement. Imagine sitting outside, being bitten by a horse fly, and choosing not to even focus one's thoughts to it? He finally realized that self-mortification was wrong. Peace and comfort of the body were directly related to the peace and comfort of the mind. Abusing the body is to abuse the mind, since together they form one reality which can not be separated.

Are we simply a product of our environment?

Through meditation, we can learn to connect with and experience the essential nature of the mind itself. We learn through the meditative experience that our mind and soul exist, and are not exclusively defined by our thoughts, our physical manifestation, and our past. We are born with a nature that exists independent of our collection of experiences and training. It allows us to disconnect from who we are, the part of us shaped by the product of our environment, and live with a fresh and less judgmental perspective.

A personal breakthrough in using mindfulness came when I was preparing for and delivering a very difficult message to someone who reported to me at work. A common human reaction would have been to play-down or hide from myself the feelings of anxiety and nervousness, and react defensively when the subject arrived. I altered my habits by being as aware as I possibly could about the issue, and tried to feel as strongly as I could the uneasiness I had with out judging them, or the employee, and then walked in to the meeting. I quietly carried my worry and anxiety on my sleeve. When the topic arose, I was the most equipped to handle it as I have ever been, since I was not trying to ignore, be defensive, or dismiss an "elephant in the room". The meeting still did not go well, but I had my wits about me, did my personal best, I had no regrets, and lived in the present moment. It seems when we try to deny ourselves of things that they become even stronger.

Job Transitions

Meditating on a new phase of life

At the break of a transition in life, how effectively the mind is cleared in order to create a mental break from an old phase of life and better accept the present phase, can have a real impact on ones' happiness. What has made success so far may not be the same in the future, so producing a clear mental break-point helps one better recognize the differences between the old job and the new. An action may range from something as simple as a massage or a fun night with friends to an extravagant trip to Hawaii or for a twist to spend an evening in the  neighborhood where the new office is. Take time to celebrate the change. Do whatever it takes to get into the transition state of mind. Start perceiving and recognizing what will most likely be a new set of effective ways to think and act.

Be... in the present
One needs to be wary of saying things like "at my last company, widget corp, we did this and this and this" and thinking that's always right. No one in the new job will put the same value on what happened in the old one - what they value is you. When you get your head in the game, and be present in the moment, your mind will react with such thoughts as"

"Wow that's interesting! This is something new in my universe. Let me view all the different dimensions of this and think about it. I am not a programmed machine who always responds with the same programming. I may  rely on my past experience, but more importantly I trust my ability to find the best path."

Remember the proverb "doing the same thing over and over expecting a different result is the definition of insanity"? For this I would customize it a bit and say "doing the same thing over and over expecting the same result in a different universe may produce wildly different results".

Relearn how to learn
Rejoice and celebrate when you feel incompetent and vulnerable because it means new learning, stretching of the mind, and new experiences are occurring. Embrace those situations and feelings, so long as they are a valuable part of your plan. Decide to learn, or become brittle and fail…

• What made me successful in my old job and can I succeed in my new position relying on those strengths or are there new skills that need to be developed?
• Are there aspects of my new job that are critical to success but prefer not to focus on? Why? How will I compensate for the potential blind spots or lack of desire?
• What do you need to do to make the mental leap into the new position? Who can you rely on for counsel and advice? What other activities can help you?
• Find ways around those who want to hold you back - it may even be your self.

Then hit the ground running! Start planning what you hope to accomplish by specific milestones, assess your vulnerabilities, and observe what you naturally gravitate to, and are those still the right things to focus on in the new universe? Even watch out for your strengths - even a strength can be a pitfall.

Accelerate Your Learning
Be systematic and focused on what you are going to learn and how to learn it most efficiently ordered by highest value - manage learning as an investment process. Learn the highest value and de-prioritize the lower value experiences. What's your learning agenda? Climb the learning curve as fast as you can. Remember in "The Matrix" when Neo started his training programs? Understand the markets, products, technologies, systems/structures, culture, politics. Identify the best sources of insight, and then drink from the fire hose.

• Know the benchmarks. How did your new organization perform in the past?
• Were internal or external benchmarks used? What measures were employed?
• Know people's perceptions: how do people think it performed?
• What were the goals? Were they insufficient or overly ambitious?
• What behaviors were encouraged and discouraged? What happened if goals were not met?

All of these things will help to determine likely perspectives those in the company have... and perception is reality.

Keep your balance: life and work

Work hard to maintain equilibrium and the ability to make good judgments. It is critical to take care of your self during periods of transition. Working extreme hours and over-doing it will not help. Unfortunately, rest and renewal get no respect in the organizational world. Instead, most managers instinctively view those who seem to need time for rest and renewal as slackers. In the beginning expectations for productivity are at their lowest, so feel safe even if you are not immediately contributing. The quality of one's initial decisions and work  will be more scrutinized so quality over quantity.

Help everyone

Expedite everyone - direct bosses, direct reports, and peers - accelerate their own transitions. The quicker you get new reports up to speed, the more it will help their performance. That new report is also you! Beyond that the benefits to the organization of systematically accelerating every one's transitions are vast.

Achieve Early Wins
High on your list may be to determine what areas such as people relationships, new or changed processes, products or solutions, can you achieve early on to cement your value in the new universe?

The devil is in the details...


Land Mines

What lurking surprises could detonate and push you off track and how will you overcome them? If your attempt to overcome them doesn't work, what would be another way to overcome? What damaging cultural or political or other missteps must be avoided.

Analyze root causes

If performance was good, why? What contributed to strategy, structure, technical capabilities, culture, politics?

Know your history
What efforts were made to change the organization? What was the result? Who has been instrumental in shaping the organization?

Barriers and Resources
What are the most formidable barriers to making change and how will you overcome them? Are there existing models that can be cloned or recycled? What capabilities need to be developed or acquired?

Culture
What elements of culture should be preserved and changed?

Match Strategy to Situation

Diagnose the situation accurately and clarify its challenges and opportunities. Clear diagnosis is essential to developing an action plan.

Secure Early Wins

Early wins build credibility and create momentum. Create virtuous cycles that leverage energy I am putting in to the organization to create a pervasive sense that good things are happening. In the first few weeks, identify opportunities to build personal credibility then identify ways to create value, improve results, and get to the point of where you are valuable more rapidly.


Processes

What are the key processes of the organization and are they performing in terms of quality, reliability, timeliness?

Negotiate Success

I will focus on building a strong relationship with my new boss. I will manage my boss's expectations by carefully planning a series of conversations about the situation, expectations, style, resources, and my personal development. Meditate on what it means to develop and gain consensus on my initial plans.

Achieve Alignment
Bodies in motion tend to stay motion. Like things "like" like things. Bring the organization's structure into alignment with its strategy and develop the systems and skill bases necessary to realize strategic intent.

Build Your Team
The universe tends towards chaos, but organization creates beauty and wonder. If inheriting a team, evaluate its members and perhaps restructure it to better meet demands. Willingness to make tough early personnel calls and capacity to select the right people for the right positions are the most important drivers of success during transition. Be systematic and strategic in approaching the team-building challenge, and don't settle...

Create Coalitions
Start right away by identifying whose support is essential for success, and figure out how to line them up on your side. Success is built on the ability to influence people outside your direct line of control. Supportive alliances both internal and external will be necessary to achieve goals.

Constantly meditate on the present and how it may shape the future

As one goes through the first few months, perform repeated meditations. Good starters could be;

• Review the vision and strategy and is it really being pursued? If not, why not? If so, is the strategy still taking us where we need to go?
• What are the stiffest challenges in the coming 12 months both personally and professionally? How will I  handle it? 
• What are the most promising areas and what would need to happen to realize the greatest potential?

These are all demanding mental exercises and take time to unfold, so be very patient with your self. The path of a 1,000 miles begins with a single step.

This article was shaped from ideas found in:

• The Power of Now: A Guide to Spiritual Enlightenment by Echkart Tolle
• The Prophet by Kahlil Gibran
• The First 90 Days: Critical Success Strategies for New Leaders at All Levels by Michael Watkins
• This was given to me by the head of Human Resource while I was running the information technology infrastructure group at a very large university endowment.
• On the High Wire: How to Survive Being Promoted by Betsy Raskin Gullickson & Robert W. Gunn