#38 - Portfolio Re-Balancing Threshold - When Do You Adjust?

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. On today’s call, we’re going to talk about portfolio rebalancing thresholds and when you need to adjust your overall portfolio. Previously, we’ve talked about in other shows why balance and Beta weighting your portfolio is really important. Now, the question is when you start to get unbalanced or when you start to tilt one direction too far or the other, when do you adjust? I’ll say it comes in two stages. I’ll take the least aggressive stage first and that is that you should be monitoring your balance at least once a week. By doing that, if you just do it once a week which literally takes you 30 minutes to do, if that, then you have a really good idea of when you’re starting to get unbalanced. It should not be a surprise. Every week, you should be monitoring this and one week, you might notice the markets made a big move higher or lower and now, because we took off position X, Y, Z or we’re past expiration or whatever it is, now we’re starting to get unbalanced. At that point, you’re not totally out of whack yet. You’re starting to lean to one side maybe, but you haven’t fallen over, meaning your portfolio is not totally unbalanced and totally lopsided, I guess. At that point, you want to start making new adjustments to the portfolio by doing two things. One, you want to add new positions that give you more balance. If your portfolio is already bullish, meaning that you make the most amount of money if the markets continue to grow higher, then start adding bearish positions. This helps out. This is why we do this strategy call every single week with elite members and talk about our portfolio balance because then, we start directing ourselves and saying, “Hey look. We’re starting to get unbalanced. We need to start adding more bearish positions this week.” The second thing is you start making adjustments to existing positions that also fit the narrative that I just talked about. Start making adjustments that make your positions more bearish. That means roll down maybe your call sides of your positions. If you have an iron condor, roll down your calls. If you have an iron butterfly, roll down your calls. You start making adjustments that are more bearish in nature to basically help you get more balance in your portfolio. This is those two things you do when you’re starting to become a little bit lopsided, you’re starting to lean to one side, but you’ve not totally fallen over yet. Now, when your portfolio does become totally out of whack… For me, this threshold is really crossed when the market is above or below one of my Beta weighted breakeven points. That’s really hard to do just first of all. If you have enough trades on and you have enough premium on, it’s probably really hard for the market to break through one of these thresholds in such a quick enough time that you hadn’t had time to adjust. But let’s say it does. Let’s say that the market, the SaP for me was above my portfolio breakeven point or below portfolio breakeven point, what do you do in that case? Well, in that case, you first want to start doing everything to one side and you want to add some aggressive strategies. You want to add some debit spreads. You want to do some skewed credit spreads. You want to really, really take on some aggressive positions that give you more balance on that one side. And even so, you still want to take off positions that are totally profitable which would help out in rebalancing your portfolio as well. Take off positions that are profitable because if the market moved to one side and if you’ve got all your positions on that side or you got at least half of your positions on that side, you can probably take off some good stuff and close those out and then aggressively get into things like debit spreads, at the money credit spreads, etcetera, ratio spreads if you need to get into those to really rebalance the portfolio quickly. I don’t think that it’s something that you need to do or probably be forced to doing if you’re monitoring it weekly. If you’re monitoring it weekly, you have a pretty good idea of where the markets are and where your portfolio sits and you won’t need to take drastic measures to aggressively adjust. But hopefully this discussion about just where these thresholds are helps. There’s no certain threshold in particular for the whole portfolio. For particular trades as we’ll talk about on other strategy calls and daily calls, there are certain thresholds that you might want to use, certain trigger points that you might want to use, so tune in for those later on. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!

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