Hey trader,
My long positions got destroyed today.
Home Depot is in freefall…Procter & Gamble dropped $4 from $174…
Consumer staples are down 5% across the board…and pharma is down another 5% to 10%.
My account is down $100 on $100,000.
Luck didn’t help me avoid the carnage.
It comes from one number I watch all day, and one rule I will not break for anybody.
Read the rest and you will know the exact number, the ceiling and floor I keep it inside, and the move I make the second a long starts bleeding.
The Number That Keeps Me In The Game
Net delta. That is the number.
It tells you in actual dollars how much of your account is going to disappear on a bad day.
Or said differently, it’s the net number of shares you own (or are short).
Add up your longs as positive numbers, your shorts as negative numbers, and the total is your exposure.
My ceiling on one account is plus 600 to 700. My floor is negative 300 to 400. I do not cross either line.
Today I sit at 285. The book leans long, and every position has a hedge sitting underneath it.
If you walk in with $100,000 and a 1,000 delta, a 10% down day on the Nasdaq just took $10,000 out of your account. One bad session, a year of work gone, and you did it to yourself.
Twenty Stocks Is Not Diversification
Your broker is going to tell you that owning 20 stocks instead of 5 is diversification. Your broker is wrong, and your business school professor was wrong too.
That is diversification by number. It is mathematically true and practically useless.
If your 20 names all move the same direction on a bad day, you are running one trade in 20 different wrappers. True diversification is asset allocation by correlation, and correlation does not care how many tickers are in your account.
I have 10 longs and 8 shorts working right now. Those 8 shorts are paid insurance, and the premium gets paid back to me every time the longs bleed.
That is why I am down $100 today and not $10,000.
Now, you’re probably wondering, isn’t delta individual to each stock? Like does a delta of +25 mean the same thing for Tesla as it would for say IBM?
No, they are not the same. To normalize the information, some traders will do what’s known as “beta-weighting” their delta to a specific instrument like the S&P 500.
Using Tesla and IBM, Tesla has a beta of 1.8x while IBM is 0.65x. You’d use those values to normalize the delta for those individual stocks and then add everything together to get a net-weighted delta.
Do Not Stack More Of What Is Killing You
Now, I want you to picture this…
You’re sitting on a long Home Depot position that is bleeding, and you decide tech is the only thing working, so you go buy Micron.
You were already delta long on a losing trade. Now you have piled more delta long on top of it.
Micron drops 5% the next session. Your Home Depot loss did not get rescued. Your portfolio just bleeds twice as fast, and you call that a strategy.
When my long is not working, I do not buy another long. I find a short.
I will buy a put to hedge the exposure. I will sell a call spread on something parabolic. Sometimes I find the direct competitor of the name killing me and short that one instead.
Negative delta against positive delta. That is the trade. Stop stacking what is already losing.
How I Build The Short Side
I do not trade naked options. No naked calls, no naked puts. I am not handing the market an unlimited risk profile, and you should not either.
My favorite hedge is selling call spreads. I sold more of those this morning on a few bank names, and I added short stock to a couple of financials underneath that.
Put spreads work. Long puts work. Outright short stock works when the slope cooperates.
When the S&P grinds higher like it did today, I add more shorts. When it sells off, I take the shorts off and let my longs run. That is tactical allocation, and it is what keeps me from waking up one morning with a 1,000 delta and a problem I cannot fix.
One-Sided Traders Get Carried Out
Bull market traders run long-only books. Bear market traders run short-only books. Both groups get carried out eventually, because no market goes one direction forever and the market has a sense of humor about it.
I carry both sides every day. I have for 39 years. It is not a phase, it is the job.
If you are 100% long technology right now with no hedge underneath, the math is going to find you. A 35% correction in the Nasdaq turns into a 50% drawdown in your concentrated book, and you will not catch the bottom because you will be busy panicking.
Twelve longs and 6 shorts. Fourteen longs and 8 shorts. Tilt one way when the slope tells you to. Do not ever run one side of the book unprotected.
That is why my account is only down $100 today.
Professor Jeffrey Bierman
Creator of the Genesis COG System
