Sponsored Link:
Can Your Portfolio Lie to You?
The Smart Profits Report: Issue #152
Tuesday, October 19, 2004
Can Your Portfolio Lie to You?: Professional Money-Management Investing Secrets
By Karim Rahemtulla
Chairman, Mt. Vernon Research
Can your portfolio lie to you? Yes! Without a doubt!
This is one of the money-management secrets I’ve learned from years of trading that I never see in any books. If you continue to track your options portfolio the way you have been tracking your stocks, you will always be misled.
So let me tell you how to keep a sharp eye on things the professional way.
Old Prices Are Right, But They’re Wrong
When you are using options, you better look at your portfolio carefully before coming to any conclusions about performance. What the broker sends or your online updating service tells you can lead you to entirely wrong conclusions. And when you are engaged in an options strategy, you need your super-powered glasses to see what is really happening.
I am an options trader. I live, breathe and sleep options… I do a few hundred options-related trades every year, so that must qualify me for something. In fact, I have been very successful at options. And still, whenever I look at my portfolio, I am dumbfounded by the number of mistakes in prices I see. Almost all of the mistakes are options related. And I know this is a universal problem, because I hear the same thing from my readers.
There’s always a little something that you need to improve, even when you are having great successes… but there’s one huge mistake you absolutely don’t need to make and shouldn’t - that’s the mistake of not knowing where you stand.
Most brokerage firms, even though they promise the moon as far as accuracy and service goes, cannot change the information that the market sends them - and with options that is often very stale information. Here is what happens…
Your Options Info Could Be Months Old - Here’s a Solution
When you look at your options portfolio, the numbers that affect what you’re doing are usually marked (recorded) based on the last trade. But that “last trade” could have occurred two months ago! Until someone else buys or sells the option, it is still listed at the latest price actually traded in the market. But it may not be the price you could get today - or anywhere close.
So, I find myself having to recalculate the value of my portfolio to reflect real life, and I have to do this often. Only those options that trade heavily on nearly every contract every day routinely have a “last trade” price close to what you’d be able to get right now.
It’s not hard to get your numbers right, but it can take some time. Here’s what you need to have so that you have a realistic evaluation of how well you are doing:
You have to track down a CURRENT quote - not the last price, but the current bid and ask prices. Watch how your portfolio’s value changes… You might find the situation very ugly when you thought all was well. Of course, you may also find you’re doing better than you thought.
The point here is that you aren’t going to get the last price unless it was made very recently. You will get the current bid or ask quote when you trade, and your results will reflect that, not some price someone else got two months ago.
But which price do you use: bid or ask? There can be a large spread between the two.
Using the Bid Instead of the Ask Price Will Give More Accuracy
The other thing that I hate almost as much as stale prices, especially when marking my covered call positions, is how the standard portfolio updating from my broker always marks the ASK price instead of the BID price. Sometimes there could be a 10% spread between the two.
That means my entire covered portfolio value is wrong until I fix it to show the BID price.
I guess the rationale behind services using the ask price is that if you had to buy back the option, you would have to pay the bid, or offer, price. But that’s not my goal. I only buy an option back if the trade has gone against me and I have to get out of it.
But my goal is to sell the option to close. And when you do that, it is the BID price that will end up in your pocket. That’s the one you need to have in your records to have a realistic picture of how well you are doing.
If you keep track of your progress by using the ASK price after you are already in a position, everything in your record will be overvalued! You get the BID price when you are selling to close a trade.
Here’s the bottom line…
When it comes to tracking your real portfolio results, you are going to have to do the legwork yourself… But this extra bit of work will mean a lot more profits - because you’ll have a more realistic picture of where your options are at any given point in time!
Good Trading,
Karim Rahemtulla
|
Today’s Smart Profits Cribsheet
- For more on options trading terms, check out our Smart Options glossary of option terms.
Related Articles:
- How To Effectively Handle Any Broker: Secrets To Getting Started In Options
- Why Your Broker Drives a Porsche and You Drive a Chevy
- Option Prices: How to Get the Best Price on Your Options
