VTS Community

I’d like to take a few minutes today and clear up a couple of points of confusion with the new VTS Discretionary Strategy.  If you haven’t seen the strategy video it’s here, but there’s two things that are important to note:


1)  The VTS Discretionary Strategy performance  (and all my strategies)  is reported based on the return of the entire portfolio including all trade fees and all unallocated capital if there is any.

It’s very common among newsletter type businesses  (especially option trading based)  to see “return on capital” being used for performance reporting rather than return on the entire portfolio which is actually quite misleading.  This is because it doesn’t take into account unallocated capital and cash positions within the account.  With option trading it’s very common to divide a portfolio up into smaller pieces so that each trade accounts for a smaller portion of the capital.

However option trading requires patience and it’s not very common to have all individual portions allocated, so return on capital can often times far overstate the actual performance.  I’ve seen many cases where people report annualized return of 20% or higher, yet when you account for the idle cash from unallocated positions the real growth rate is often times just 1/3 or 1/4 of that.  So I always use return on portfolio including fees and idle cash.

As an example, if our CVS trade expires out of the money we will collect 2$ in premium.  “Return on capital” that is 2.96% return  (200$ on 6,750$)  but return on the entire portfolio including idle cash is only 0.8%  (200$ / 25,000$).

If our first trade is successful it would be misleading to report a 2.96% return given the portfolio would only see a rise of 0.8%.


2)  We use a 10% total portfolio stop-loss for the strategy

* As I mentioned when we opened the trade, I strongly recommended people just paper trade this for a little while as a learning strategy, but let me explain how it would work under normal live trading conditions:

For consistency I use a hypothetical 25,000$ account.  Remember “return on capital” is deceiving and not representative of actual performance because there will always be idle cash so a capital amount has to be chosen and 25,000$ is a good hypothetical account size.

My last trade in CVS was a cash secured 67.50$ put which means it requires 6,750$ in capital per option contract.  That’s what makes it cash secured.  I reserve the capital ahead of time in case I get assigned.

Now this won’t normally be the case, but since this is our first trade within the strategy 6,750$ is only a small portion of the available 25,000$ capital.  It’ll take a little while to find some viable trades to use up the idle cash.

So 10% stop-loss on the total portfolio is 2,500$.  This first trade won’t likely breach that unless something very severe happens so for this first trade, I’ll use 10% of the trade as the stop-loss.

6,750$ capital requirement  x  10%  =  675$

* going forward we will always use 10% total portfolio stop-loss

If this current trade is down more than 675$ per 1 option contract that will breach the stop-loss and it will either be closed or we will sell another put.  Until then we’ll just keep it open and take assignment of the shares if necessary.  So you can mark 675$ per 1 option contract in your trading software and track the trade.  It’s currently down about half that.


Remember that is part of the Wheel of Fun strategy and in fact sometimes being down a little money is the most desirable position because that way we can get assigned some shares and continue the wheel of fun and sell covered calls to get rid of the shares.

Some people find this a little strange at first that we like being down money, but with a little practice and seeing a few trades in action it’ll make sense soon.


Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

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