Back in 2021 I wrote a post titled ‘The One at a Time Portfolio’. It refers to a strategy where, after a single trade is made, you do not add a new position to your portfolio until the first position is either exited or you’ve substantially reduced or eliminated the initial cost of that position. This strategy avoids the situation where multiple positions in a portfolio are underwater or trading for a loss. In my experience, the number one reason most option traders fail is due to a weak risk management strategy. They’ll add multiple option positions at the same time and will often double-down or trade without stops resulting in huge losses. They then add more positions to their portfolio in an effort to get back to at least breakeven, and, before they realize it, they’ve blown up their account. Now, nobody can promise you that there is any way to guarantee profitable trades but there is a way to avoid catastrophic losses that happen quickly! If you follow the method I’ll describe below you’ll never have more than one losing position in your portfolio at any given time. The winning positions however are not limited by the strategy. The easiest way to teach you this method is showing you exactly how I did it with 2 actual IBM positions that I currently hold in my portfolio. These are actual trades and positions, not hypotheticals!
Below is the history of my trade fills in IBM. I was expecting lower prices so the first trade was a Put Vertical Debit spread and it was made on 1/25. That was position number one. The initial cost of that trade was $2,250. On the very next day, 1/26, the price of IBM dropped as expected so I was able to ‘roll’ down the Vertical spread into a Put Condor. In making that adjustment I collected a Credit of $2,050. That left me with a Put Condor with a net cost of just $200. I had now reduced my capital exposure by 91%. I consider that a substantial reduction in my initial risk so I allowed myself to consider adding a new trade to my portfolio. Had I not made that adjustment I would have had to wait until I was able to substantially reduce that cost or exit the position, whether for a profit or loss. The second position was initiated on 2/6 for $1,875. That cost, plus the $200 of net cost I had in the first position, meant I now had $2,075 of net capital at risk. That’s slightly less than the $2,250 that I spent on the first trade. A big difference however is that I now owned two positions for less than the cost of the original one! I held the second position for more than 1 month before I was able to roll down the $15-wide Put Vertical Debit spread into a $10-wide spread. That brought in a $1,780 Credit taking my net cost on position number two to just $95! Between both positions combined I had a net cost of $295! Scroll down to see the risk profiles of the positions.
Below is the risk profile of position number one. It was a standard Put Vertical Debit spread.
Below is the risk profile of the first position after I rolled it down into a very wide Put Condor. Notice the reward/risk ratio of the position. Risking $200 of my initial capital to potentially make $4,800 is a reward/risk ratio of 24:1.
Below is the risk profile of position number two. It was also a standard Put Vertical Debit spread.
Below is position number two after I made the cost reducing adjustment. All I did was roll down the the 135 Put to the 130 strike for a Credit. That narrowed the Put Vertical Debit spread from $15-wide to $10-wide.
Below is the combined risk profile of both position one and two. It looks a little unusual because there are two different expirations, April and June, combined in the position. You can see from the comments on the risk profile that my net initial capital exposure is just $295 but I can realize a profit of $9,705 if IBM is at or below 120 at April expiry and between 105 and 120 at June expiry. I’ve leveraged the potential profits while reducing the initial risk!
I know some traders will say that this method is to slow and methodical for them. To each his own, but for all of the traders out there struggling to make profits and for those who sometimes find themselves in large and difficult-to-manage positions that keep losing money day after day, consider this alternative. Below is a link to the original post, check it out!
Link to: The ‘One at a Time’ Portfolio
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