It is the time of the year to review our investment portfolio and make plans for the year ahead. One of the biggest lessons that I learned in 2022 is to always expect the unexpected and be prepared for the worst-case scenario. It is not how much you can win but rather how much you can afford to lose.
Read more lessons learned here:
6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading
After clearing the big baggage that I carried for a year in 2022 and taking a huge loss on my LEAPS CALL Options Portfolio, I felt lighter now and ready to take on 2023 with a new plan and strategy. This is my current funds’ allocation:
My previous 1M portfolio is down by 40% after I sold off my remaining LEAPS CALL positions at a total loss of 415k. If I factor in another 321k of unrealized loss, my net liquidity aka surrender value would be 288k.
My current capital allocation is divided into 3 portfolios: stocks, options and bonds/ fixed deposits.
I am planning to keep my funds for options trading (Vertical Spreads, Buying of CALLS/ PUTS) to just 10% of the total portfolio allocation, which means that if I were to lose it all in another disaster, I would only be 10% down on my total capital. Currently, it is only at 3%, which means I can allocate more funds to this portfolio in 2023. In 2022, I allocated around 45% to options trading and that was a big mistake as I eventually lost a bulk of them through the prolonged bear market of 2022.
In the meantime, my US stock portfolio, lest Alibaba, is doubling up for me to sell Covered CALL to generate some returns periodically. I am also slowing DCA (Dollar Cost Average) into SPY (ETF for S&P 500) because I think that is the safest stock in my entire portfolio. The ETF for the 500 biggest companies in the US is self-cleansing (underperforming companies will get replaced every year) and will have almost zero chance of bankruptcy. I hope to accumulate at least 100 shares over the next year for me to use as collateral to sell Covered CALL options. Given the current market condition, I will not be too anxious to load up and will wait for a deeper crash before adding more SPY shares.
Options Portfolio (Wheel/ Selling Covered CALL)
With the above stocks as collateral, these are my current (open) Covered CALL positions.
Options Portfolio (Vertical Spreads)
The bulk of funds in my options trading portfolio comprises my Vertical Spreads positions. At this time of writing, the below are my open contracts and all of them are bearish bets. Most of them are in the green, which means I can close them for a profit now.
Emergency Funds
The current funds’ allocation that I have for emergency funds is around 14% but I am trying to build 100k reserves into Bonds and Fixed Deposit (FD), which would last me around 2 years of family expenses in the worst case that I lose my job or all shares go to zero. I previously calculated that my family’s monthly expenses are around $4,000. I currently have 84k already in Singapore Savings Bonds and Fixed Deposits. These are capital guarantees and I can withdraw the funds in a short period (at most 1 month). If I do not need them, they will help to generate around an average of 2.5% to 3% of interest per annum.
In 2022, I set very little money aside for emergency funds as I YOLO most of my money into options because I wanted to generate more money from options. Thinking back, it was quite risky as I would end up with nothing if the stock investments or options trading failed. With these 100k emergency funds, I can rest assured that I still have some money to sustain my family’s livelihood, even when shit hits the fan.
I hope this sharing is useful to you and I encourage you to review your portfolio yearly and plan ahead so that there is still a chance to rescue your portfolio. If you leave it on its own, the losses may compound until a point of no return. I wish you all a fruitful and successful investing year in 2023, all the best!
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Hi Jason,
What is the take profit / stop loss strategy for the debit spreads?
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Hi Guy, will exit if the loss is more than 50%. The capital for the vertical spreads options portfolio is sized at 10% of total capital to act as a 2nd layer of protection against a total collapse of the options portfolio.
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You started with 1M and lost about 70% of that – 40% being actual loss from the LEAP Calls you bought and 30% being paper loss from the stock holdings which were assigned from the cash secured puts you sold. However there is still those premiums collected from selling those cash secured puts and covered calls which you did not factor in? That should be about 100 to 200K USD over the course of the last 2 years when you were running the wheel?
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Yes, that’s right. In Year 1, I made around 222k (SGD) from Wheel and LEAPS. In 2022, If I did not factor in the 415k loss, I would have made 211k from a combination of Wheel and Vertical Spreads. I am planning to update this in the upcoming blog article.
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