How to allocate portfolio capital?

Portfolio Allocation is an interesting discussion topic that I have been asked time and time again.I thought to share my perspective with all and hopefully I can bring some value to OP readers. I shall try to keep it as simple as possible.

There are some guidelines that I follow:

  • I should be in hot sectors
  • I should be well diversified
  • If one ticker goes bankrupt I should have capability to absorb the shock and come back
  • Plenty of cash for adjustments or any exotic opportunity that hardly come by

Keeping I mind these guidelines; here is what I broadly use:

  • 20% of portfolio capital always in Cash.
  • 40% of capital for current month of trades and 40% for the next month.
  • For the current moth no more than 8% of overall capital in one trade (exception, unless I am very confident)
  • No more than 7 underlyings for a current month and 7 for the next month (A maximum for 14 tickers).
  • No more than 3% in one speculative trade.
  • No more than 8% of overall capital for all combined speculative trades and no more than 3 speculative trades at one time.

Let’s take an example of US$10,000 portfolio.

  • $2,000 always in cash
  • $4,000 in Current month and $4,000 in next month
  • Maximum of $800 in all speculative trades.
  • Maximum of $300 in one speculative trades
  • Depending upon your trading plan, you may not have opened next months’ trades, and then this is treated as “sacred”. This is next months’ share, don’t touch it.

These are just for guidelines and it helps me clear my brain when I have to make choices. This doesn’t mean that I follow this ALL the time, but this is something I always keep handly to help me make decisions. I do make exceptions when I am quite confident (that’s subjective) but exceptions should be well understood.

Hope you find this useful. I would surely love to hear your comments about the plan.






12 responses to “How to allocate portfolio capital?”

  1. dan gundersen Avatar
    dan gundersen

    when you say 40% of capital in current month, if a person is doing credit spreads rather than outright purchase, would that mean your total risk for the month should be 40%?

  2. OptionPundit Avatar

    Yes. That’s correct Dan. If I have a credit spread(s) only, risk(800) , credit (200) then yes, 800 should be no more than 40%

  3. Steven O'Toole Avatar
    Steven O’Toole

    Thanks for showing how you allocate your portfolio funds. Do you have special software that keeps track of the amount in each category (speculative, current month, next month, by sector etc.)? Or do you do it manually?

  4. odaz60zy Avatar

    Thanks for your insight. It is very helpful

  5. Diana Avatar

    Hi OP, would a $2,500 be too small for your strategies?

  6. OptionPundit Avatar

    Dear Diana,

    It depends on risk/reward with respect to capital availability. As per my June trades suggestions (there were 5 suggestions), all we needed was roughly $6000 per combined spread across 5 underlyings…then you go by the above portfolio allocation, i think you may still open 1 complete mini portfolio and keep rest of the money for adjustments etc. Sure this may not meet 8% criteria, but then, there is always trade-offs.

  7. […] June’07 income trade portfolio is closed and I am happy to announce that this is 2nd month in running for a double digit growth (My target is 5% to 7% monthly return on overall invested capital). May portfolio delivered +22% and June delivered +33.5%. OPN is my real money portfolio. I don’t believe that by just investing in 1 trade, generally an Iron Condor as shared by several newsletters, one can grow his or her portfolio for 1000s% gain compounded, maybe, but not for me as I will never invest all my money into one trade and therefore I use a potfolio approach (Portfolio allocation guidelines). […]

  8. […] When I kicked-off OPNewsletter few months back I started it with the objective of 5-7% monthly returns on “invested portfolio” (it delivered consistently >+20%) and also shared portfolio allocation guidelines. […]

  9. OptionPundit | How to allocate portfolio capital?…

    Link: OptionPundit | How to allocate portfolio capital?. Portfolio allocation is something I’ve been addressing and tweaking to fit my trading style. OptionPundit has some good guidelines….

  10. […] trade”? What % I shall withdraw and how much I shall reinvest, etc. Here is my article on how to allocate portfolio capital. Managing Money is a process and one gradually learns how to manage large capital through a […]

  11. jon brown Avatar
    jon brown

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  12. […] trade”? What % I shall withdraw and how much I shall reinvest, etc. Here is my article on how to allocate portfolio capital. Managing Money is a process and one gradually learns how to manage large capital through a […]

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