PCLN Follow Up / Trade / Add to / Risk Management

PCLN is one of the original 2012 core shorts (equity only, no leverage), others may have moved more including AAPL which saw a nice drop, BIDU was a great performer, but PCLN remains as a core short.

 PCLN was shorted at an average price of $761.79  putting it at a +18.89% profit. When PCLN dropped -17.28% in one day, I should have just closed the entire position and looked to reestablish it at higher levels like where we are now. In any case, there's room to add to PCLN (I don't recall, but I may have closed a partial position on that drop). I'm going to treat the PCLN add-to like a brand new position for risk management/position sizing.

The 4 day trend channel has in the past, held 1+ year trends in PCLN, it would have been stopped out of the long at the red arrow and the current short "Buy to Cover" using the same channel is $648.30.

I can add approximately $4k toPCLN so my risk including the profit already there is almost non-existient, but as a new position assuming a round $100k portfolio...

Typically I don't want to go over 15% of portfolio committed to any one trade, the days of Modern Portfolio Theory are long behind us. during the crash of 2000 in to 2001 you could have gone in to commodities and either hedged downside risk or you could have actually just been long commodities and made money while the rest of the market took a dive, these days however...

GONE!

 The market is more just "risk on" or "risk off" so I don't see a need for large diversity like the past if diversity serves no function.

The 15% general rule or about 6-7 positions, is really more for the one risk in the market that is difficult to account for, the gap.  Heck, take a look at the -17% gap down in PCLN in one day, with a 15% rule that would leave a loss of $2550 on portfolio value which is 2.5% of portfolio, a little more than the 2% rule I prefer, but still manageable.

I do have a tool for looking at gap risk, it's a custom screen in StockFinder specifically for gauging gap risk.

PCLN's biggest gap of the year up or down was 104.70 points, the day it fell it was 117 points, but that's as of the close, not the opening gap. It's pretty easy to figure out what the maximum reasonable risk is for PCLN, unfortunately pretty high at roughly 17% or about.

Looking at the Trend Channel as a stop the risk per share is $30.30 (stop at $648.30 and current price at $618= $30.30).

For a typical 2% rule, my risk money on a $100k portfolio would be $2000, divide that by the risk per share from the Trend Channel stop ($2000/$30.30=66 ) and you get 66 shares. However 66 shares of PCLN at the current price would be  $40,788 or nearly a 41% position size, way too much. A gap like we saw at that position size would have taken $7k or 7% in a single morning.

So the max risk is back at 15% of portfolio ($15,000/ $618=24.27 shares, you can round that to 24 or 25 obviously.

We still have the gap problem being bigger than 2% so in most cases my position size and risk would be figured out as above, but since we know PCLN is capable of these kinds of gaps, we'll use the $104.70 or roughly 17%. At $618 that's $105 per share, so $2000/$105 =19 shares which at $618 is $11,472 which is also below the 15% general rule, that's about the right position size for PCLN.

If we take out that extraordinary gap, most of the time the 2% rule is going to define risk so the closer you are to your stop, the more shares you can take on as long as you keep it at a reasonable level (for me that's 15%). This is one of the main advantages in being patient and letting the trade come to you, you get a better entry, you have lower risk and you can open  a position of optimal size.