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An interesting question that I think about when I end up with a big $
position in a low vol stock....
The quick answer is, no, I don't limit $ size per position. The realities of
my brokerage account will limit the $ size of my portfolio, and that will
occasionally mean that if I have capital room for two higher vol positions
or one lower vol one I will tend to go for the two higher vol positions for
diversity reasons. I don't see where the $ value of the stock comes in,
except where I lose granularity (e.g. on futures contracts my model might
want me to invest in 2.289 contracts of something so I'll buy 2).
All stocks are well correlated when markets crash, so to some extent ATR
differences would go out of the window in extremis. So if all stocks gapped
down 10%, then I would lose more dollars than expected on my low vol long
positions. Nevertheless, I still wouldn't lose more than 10% on the whole
portfolio - and the end result would be the same if I was fully invested
whether I had 1 position or 20.
The bigger problem is single company event risk. Low vol companies can be
bought out at 20% premiums just like high vol ones, so a short on a lower
vol company (i.e. a higher $ value) would then cost me more $s. Should I
care? - probably. But I should also care about issues like correlation (e.g.
sector risk concentrations) but with swift portfolio turnover I don't have
the time or the software to do it.
Right now the lowest vol stock in my portfolio has a $ position size 3.75
times that of the highest vol stock.
Andrew
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of metastkuser
Sent: Thursday, June 30, 2005 3:21 PM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: [EquisMetaStock Group] Re: CATASTROPHIC LOSS
Andrew,
Thanks for the reply. You wrote: "The control is position sizing. I size my
positions such that 4*ATR = 1% of total equity."
Do you also limit the maximum $ amount for a single position? Perhaps a max
of 10% of your total equity per position? For example, following your
position sizing rule above, what if the stock is $5,000 a share? Would your
limiting factor be the 1% risk or the maximum $ amount per position?
--- In equismetastock@xxxxxxxxxxxxxxx, "Andrew Tomlinson"
<andrew_tomlinson@xxxx> wrote:
>
> I have certainly found myself with 10% to 15% losses on positions
overnight.
> The control is position sizing. I size my positions such that 4*ATR
= 1% of
> total equity. Even if I take a larger size loss due to a gapping
move going
> past my stop, the limit to the overall size of the position keeps the
> portfolio out of trouble. These are occasional, annoying losses, but
they
> will happen. Price changes in securities markets are not normally
> distributed, and these are the moves that show it.
>
> Andrew
>
> -----Original Message-----
> From: equismetastock@xxxxxxxxxxxxxxx
[mailto:equismetastock@xxxxxxxxxxxxxxx]
> On Behalf Of sebastiandanconia
> Sent: Thursday, June 30, 2005 1:13 PM
> To: equismetastock@xxxxxxxxxxxxxxx
> Subject: [EquisMetaStock Group] Re: CATASTROPHIC LOSS
>
>
> My definition of "catastrophic loss" is different from yours. A loss
> of -15% on a single position in a diversified portfolio isn't
> serious, IMO. If it was a -15% loss across the board for my whole
> portfolio, that would be significant. (And, somewhat ironically,
> during the conditions under which this might occur, good money-
management
> wouldn't protect my portfolio from a major loss.)
>
> But to answer your questions:
>
> 1) I rarely have a large loss on a single position.
> 2) Good stock selection and understanding of market conditions
> (favorable or unfavorable) is better protection than puts, position-
> sizing, stop-losses, etc.
> 3) Large one-position losses don't have a major long-term impact.
> 4) When it happens it typically it happens to one position. I try
> to be out of the market during times when my entire portfolio can
> take a hit.
> 5) The psychological effects (I assume you mean "negative") are very
> intense in the short-term, but quickly fade.
>
>
> Luck,
>
> Sebastian
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
> <andysmith_999@xxxx> wrote:
> > I understand from time to time, a position will take a huge loss.
> >
> > Perhaps something happens after-hours and the stock opens 15% lower,
> > well below the stop. One way to avoid this is to not hold over
> > earnings. But a plunge can still happen for reasons unrelated to
> > earnings.
> >
> > I have found very little in the money management literature on this
> > subject, so can a few of the experienced traders please provide some
> > guidance:
> >
> > 1) How often has this kind of catastrophic loss happened to you?
> >
> > 2) Are there cost-effective and practical ways to protect against
> it?
> > (eg. buying put protection for long stock that is held for a few
> days
> > is not practical).
> >
> > 3) How have such losses affected the long term return of your
> portfolio?
> >
> > 4) When these catastrophic losses happen, is it isolated to one
> > position or does it affect all your open positions?
> >
> > 5) What were the psychological effects?
> >
> > Thanks!
>
>
>
>
>
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