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This is the weekly article and Pod/Video Show 30 – It’s All In The Risk
We having fun this week? If you’re a reader of The LongVol Report and paid attention, executed and stayed patient it’s been a hell of a week – for both short-term trading and the Swing/Core portfolio. This week we’re going to discuss what we normally do but add in “Risk” – this is a topic that varies wide and far so don’t assume you know what I am going to say and just try to listen (or don’t).
New Readers Here.
If you’re new here welcome, make sure to subscribe on YouTube and/or Spotify – you can get free daily market updates on LongVolReport.com.
We publish the article of the week every Friday here on TheLongVol.com and then the podcast/videocast is on Spotify and YouTube.
Three main topics for today’s show – as always, a life update then:
- Articles of Interest from This Week
- Broad Market Discussion – Yen Roll Off (as discussed last week) VIX lower and equities higher
- It’s All In The Risk – A discussion on Portfolio Management
- Q&A for The Week
Quote of The Week
Favorite Articles This Week
It's All In The Risk: A Discussion on Portfolio Construction
This week in DeltaOne I was having a discussion with a member about stock selection and portfolio construction – You might have seen him, he’s an Ex Institute of Portfolio Management and Trading student and I’ve been working with him to develop things for his investing. Before I start, let me preface things as I always do because I know very well how things get lost in translation in this business:
He is an investor/trader – not a day trader, not a futures trader – so this discussion (if you’re expecting that) to be around “R multiples” or stop losses or any of that is not what this is. There are different levels to this business and I say this not disrespect any of you readers just finding your way but running a long/short portfolio is different than day trading futures/options and you’ll see that here in this section of the article of the week.
There are infinite ways to construct a portfolio and to be clear, there is NO right or wrong way, there is only the way that makes sense to your market views, desires for returns, threshold for risk and personal world views – so let’s get that out of the way to start.
This week I interviewed David Hay of Evergreen Gavekal and he discussed that a bit as well.
But, let’s hash out some basic principles we believe in at our firm which translates over into what those in DeltaOne use as well:
- We have short-term trades 0-10 and a 10-20 day window
- We have “Core Positions” 30-90 days or 8-24 months for high conviction ideas
- We go long/short it makes no difference as along as there is alpha
- Risk varies based on the idea conviction
- Short-term trading risk is usually less than 1% of portfolio capital
- We understand and analyze each stock/situation independently meaning there is no one idea that has the: same risk, stop or target as the last
Going back to the discussion this week we were having. There was a stock he analyzed, top-down really well. The stock is categorized as a growth stock – as such, growth stocks have characteristics of how they should trade (Note: if you don’t know what a growth stock is or some of what’s said here please just use Chat GPT or similar)
That’s not opinion, by the way. That’s how most of those stocks trade but again I’m not here to convince; you can go and review the statement made here should you want (and should).
So, if we understand the difference between how certain stocks trade then you have a reasonable expectation of what to expect, how to size it and overall, what comes with that investment. This is the equivalent to someone going snorkeling in the Bahamas seeing sharks then going “I didn’t know there were sharks in this area” – so you need to know what you’re actually trading and to be blunt, most don’t.
Personally, I’m not just a value investor, growth stock investor, options trader or even just a volatility trader – I trade it all if it makes sense because I believe in the Absolute Return Approach to markets and investing.
That’s not for everyone and it shouldn’t be but I’m just giving you perspective.
But, you have to know what it is you’re trading so that you can then properly allocate that into the portfolio with the A) Right size and B) Expectation for the return time.
I’m going to illustrate this to you with 3 recent ideas from The LongVol Report.
Example One: Papa Johns (Core Hold)
Not a growth stock, not a high dividend paying stock and not really a value play either (Discussed it here a few months ago) . More of a turnaround idea that could perform well but one that I expect to take 3-4 quarters at a minimum. So, there you have it – expectations are set which then means I don’t go into it buying it and then keep checking it each week to see where it’s at. A turnaround is NOT instant – a trade, is – and if that’s what you want then use the Active Trader and be done by 11:30am ESTeach day.
With the research out of the way I can they decide how much (if any) of it takes a place in the portfolio. I can use the equity or LEAPs or both – but NOT using short-term options on it because IT IS NOT A STOCK with a volatility profile that makes sense for it.
Quick note: Some ideas can be used with LEAPS (12+ months options) I do that a lot as needed.
Example Two: Nike Swing (AST Alert)
In July I wrote this piece on Nike. Let’s read it here.
It made it into the Swing Monitor, you can see the notes. Not a stock I want to bet on as a long-term hold but a stock that I want to use as a Swing Trade. (Again, not going to explain why, if you want to know more apply to DeltaOne).
That means sized smaller and using deep in the money calls.
It drives revenue for the portfolio without having to size it and watch it each day.
Bill Ackman bought it last quarter and it rallied hard which is great, Bill has his views, I have mine but Bill is also running Billions: I’m not there, yet.
We made money on it rather quickly with the AST Alert – doesn’t mean either that we won’t buy back into it just means we’re using the stock for a certain utility and that utility is not buy and hold or day trading. This is important to try to understand because most take the view that EVERYTHING is an investment long term: it’s not and it DOES NOT HAVE TO BE.
But then, if you ask me why that is I’d tell you that most don’t understand how to build a portfolio and are more apt to find a stock to buy and make them “rich” whatever rich means to ou.
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Example Three: SMCI (Short-Term Trading)
This past week in The LongVol Report I highlighted 3 names from The Momentum Monitor – this Stock Monitor serves a purpose, just like certain stocks serve a purpose, for portfolio construction.
Short-term trading, whether that is event-driven strategy, momentum or other is useful at times within a portfolio. The problem as I see it is that most retail investors only do this and then think this is the ONLY strategy – most learn the hard way whether they admit it or not but when used correctly, at the right times, and with small risk it subsidizes the rest of the portfolio.
This week SMCI was proof of that. The stock rallied nearly +25% in 4 days making both directional options and or spreads a viable way to generate alpha.
Like I said above on Papa Johns – this is a stock that has a volatility profile (just as others do) where it makes sense to use options on it to trade – you can be more efficient with your capital on better products/names if you care to dial it in.
Concluding
Look, there is no right or wrong way as I started off on this but there has to be a consideration for it at some basic level. When we speak with clients at our firm (again we only work with accredited investors and qualified institutions) we discuss this in-depth to make sure we understand what they’re after, their tax liabilities and so much more.
Again, if that’s not you then use The LongVol Report or DeltaOne which comes with it anyway and just let us do the work and you learn and put on positions as needed.
There’s a scene from Billions – and I am hesitant to even post this because it’s a little corny, but I know people do well with context and maybe this helps you understand this a bit more with this scene.
The point is this: there’s a lot of ways to slice the bread (meaning make money) but if you just randomly punt at ideas in a portfolio with long/short the odds of making it out alive are slime to none.
Broad Market Analysis - We Called it (Again)
We got the rally on risk assets with the Thursday data coming in and the Yen dropping which has allowed this to move higher. Again, what we do for our clients and the long/short strategy is not predicated around buying the SP500 at large but this was a welcomed move.
The hard part is when you get to a sell zone deciding what happens next. Too intricate for explanation here but this week took some keen observations, re-entries and patience as we approached that zone on Nasdaq. The news was the catalyst to drive it and this is part of what we said last week:
Part of the notes from Sundays LongVol Report were as follows but we were at a technical inflection and the economic data played a big part in that decision process to short or add/get long.
- This was a Tweet I took notice too from Seth Golden. Whether this plays or not will be interesting but again not basing whether to buy or hold on this because not what we do.
- Interestingly enough, the VIX reversion lower made sense, and I believe is driving some of this move higher. I still don’t think we’re out of the woods and this was more of a technical trade in the markets and believe we’re going to trade back into that range next week with Vol spiking higher again.
Japanese Equities also Rallied
Positive in that is that there were a few Japanese equities we picked up for portfolios for clients during the chaos (Toyota Motors Being one of them – also a name put into the report).
The stock is up +16% in 10 trading days and a name we’ve waited on for nearly 4-5 months. Sometimes, the fundamentals make sense but the market-timing doesn’t so you just have to wait and that’s okay!
The AST Swing Portfolio was on fire again this week.
- Nike swing long was closed – big trade we scaled and held, thank you Bill Ackman for the boost.
- PayPal Swing (Second leg closed)
Moving on….
We’re waiting on Advanced AutoParts still…Article from Yahoo Finance this week. Plus,. earnings are around the corner.
Victoria has another secret: They have a new CEO….I like to see that esp. since I was a fan of this name last fall, we made money on it and then earnings earlier this year were dismal.
This has my attention again…so it goes back into the report, and we’ll see if it makes it into client portfolios.
I wrote about it last October, here is the link – that’s the image from the article below.
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Final Word.
- Report out this weekend Issue 32
- Nice rally this week, congrats to readers!
- For those trading part-time, learning or with less than $25,000 – active trader is open.
- If you are an investor with experience and meet requirements, apply for DeltaOne – the window is open
Opinion, not advice. Not a solicitation.
Next Lesson
Patience Pays and Stock Market Sentiment
GXO Logistics and Stock Market Sentiment
Ready for Take Off or Jet Lagged?
About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital Management L.L.C., a multi-strategy investment management fir. He has over 15 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
