Doug Ashburn is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 38 #1– 2.
The naked put strategy includes a high risk of
purchasing the corresponding stock at the strike
price when the market price of the stock will likely
be lower. Naked options strategies involve the
highest amount of risk and are only appropriate
for traders with the highest risk tolerance.
to be more conservative with retirement
accounts—401(k)s, IRAs, and other components of our retirement nest eggs—than
with trading accounts. This conservative
approach typically gets more pronounced
as you approach retirement.
Yet, if you were to take a total-return
approach to your assets, a conservative
tendency in your retirement portfolio may
lend itself toward a higher risk tolerance in
your trading account.
Let’s go back to the windfall example.
Instead of an overnight doubling of your
trading account from $25,000 to $50,000,
suppose your retirement account size were
to double, say, from $200,000 to $400,000.
It’s unlikely this would prompt you to dou-
ble the risk in your nest egg. But you might
consider upping the stakes in a smaller
When you consider total risk as a per-
centage of your total account value, the
marginal utility of your trading account’s
dollars might be higher. So if your instinct is
to put no more than 30% of your trading ac-
count at risk at any point, a rise in your total
account value might raise your marginal
utility for those trading dollars, prompting
you to raise your deployment limit to 50%.
In the end, it all goes to the same place.
THREE S TRATEGIES AS YOU RAISE UTILIT Y
Suppose you’ve assessed total utility and
you’re ready to up your total risk tolerance.
You have six open strategies, each deploying 5% of trading assets (a total of 30%).
You’ve decided to take that number up to
50%. Consider three approaches:
1—More potential trades. Instead of six
strategies, each deploying 5% of available capital, add up to four more.
2—Higher volume per trade. If you’re tied
to your six go-to strategies, take the 5%
threshold up to 8.33%. Instead of those
six OTM puts at $2.10 a piece, you could
buy up to 10 of them.
3—More risk per trade. Instead of selling
four $5-wide put verticals at $2 apiece,
for a total max risk of $1,200, widen
the strikes and sell, say, four $8-wide
spreads for $3 apiece, for a total max risk
BUT SHOULD YOU THEN TAKE ON MORE
risk? Not always. You might want to scale
into it, because utility works both ways.
Changing market conditions and shifting
account value naturally affect utility. Check
in on it from time to time. And don’t be
ashamed to dial it back if volatility, a widening of bid/ask spreads, or a general market
downturn push risk utility downward.
When it comes to utility players, the
name of the game is versatility.
FIGURE 2: Normalize it. The Beta-Weighting tool on thinkorswim shows how all your positions perform
against a standard measure like the S&P 500 (SPX). Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
THE WHOLE ENCHILADA
Analyzing utility means looking at a trading account in terms of your whole portfolio. If you hold positions in more than one TD Ameritrade account, it's easy to get a holistic view. On the thinkorswim
platform, at the top under Account, select TOTAL (ALL ACCOUNTS).
Once there, you can “beta weight” them against a benchmark like the S&P 500 or the index
that closely matches the securities in your portfolio. Remember, making a trade with $500 of risk
doesn't necessarily add $500 of risk to your portfolio. The effect may be more or less, and a hedge
trade will theoretically decrease total risk. Beta weighting lets you normalize all your positions to
a single standard so you can assess risk parameters such as delta and volatility. (See Figure 2.)
Overall, assessing the options in your trading account against your entire portfolio can help you
determine the total utility of your trading dollars.
For more on beta-weighting, hop over to our sister publication, The Ticker Tape, by going to
tickertape.tdameritrade.com and entering the term "beta weighting" in the search box at the top of