Q & A. Number of Underlying Assets to Trade at One Time

From reader TR:

Do you recommend that a beginner start by only trading one underlying index like the RUT?

I am glad Dave asked his question because I have wondered why you
would only trade one underlying?

Because it seems like you may be
giving up on potential opportunities on well priced options on other

But I guess the reality is that using one underlying makes it
much simpler from a portfolio management perspective (watching your
overall delta and gamma). And perhaps your strategy is to sell your
favorite iron condors regardless of the price because you choose not
to out-think market sentiment on implied volatility?

I would love to hear your perspective on this.



Good question.  As requested, I'll supply my perspective on this.  But please remember it's my perspective and my comfort zone.  Please do not assume that this technique is best for you.

First, the beginner: How many different positions do you want to own at one time?   If the answer is 'several' then it's a good idea to diversify with a single position in each of a few different underlying assets.

For paper trading accounts, I suggest carrying as many positions as you can handle with ease.  Paper trading is a learning process and you must not be overwhelmed with too much going on at one time.  Begin with two, and add more as it becomes comfortable.

You may want to own positions that expire in more than one  month for each index (this means an Oct spread and a Nov spread.  I am NOT referring to diagonal spreads). 

It's all practice.  The idea is to gain experience – but it's essential not to be overwhelmed.  When it becomes time to consider an adjustment or take a loss (and it will happen), you want time to consider your actions – not be forced to work on three different positions at one time.

Owning different positions gives you experience with a specific set of options.  You may find that you get better fills with one than with another.  Or you may find a different reason for preferring one index to another.  That's how I settled on RUT.

If using real money, then begin with one position.  Expand to another only when ready.

As time passes you will discover if you prefer the added safety that comes with diversification, or the ease of trading a single index.

Regarding my personal trading:

Yes, I recognize that I may be missing opportunities.  But it takes time and effort to find them, and I spend all my time working on a single index.  My goal is to make money – not to make the most possible – but to make 'enough.'  And it's important to manage risk.  That takes time and is something that cannot be ignored.  Additional positions means working on a larger number of risk reduction plans.

I own many different iron condor positions simultaneously.  I also sell credit spreads (calls or puts) when I see an opportunity.

It's an impossibility to manage each iron condor separately.  Thus, I have one large portfolio of options, composed of call spreads, put spreads, or both (iron condors).  I'll use other strategies, depending on market conditions.  But, I also own risk reducing positions (described in my book). 

Thus, it's a complex portfolio and I have no willingness to spend the time and effort on seeking additional profits elsewhere.  When trouble arises, I must be completely focused on portfolio protection, and I'd hate to be forced to deal with two sets of options simultaneously.

In other words, managing a portfolio composed of many positions on a single underlying is preferable for me.  It may not be that way for anyone else.

I buy (not sell) iron condors, but not 'regardless' of price.  I'm flexible and will not refuse a trade for a nickel or dime.  But, there is risk involved and when buying iron condors (that means collecting the cash), price is important.


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