But while you may be saying that I cannot possibly know that, the truth is…
The market is betting billions of dollars on these predictions 🙂
And if you give me just 10 minutes of your time…
You will also know exactly how much money myself and the market think you can make in the next week.
And exactly how you can find out too.
All you have to do is compare apple’s to apple’s!
Beta is a term that gets thrown around a lot in the investment community but here is a video that describes beta very well:
The long version of beta is that you take the movements of two stocks, compare their returns, then take the standard deviation of those returns, then divide them by themselves.
But the short version of beta is comparing the returns of two stocks over time and producing stock equivalents.
The good news is…
You won’t have to worry about calculating beta as we will do it for you…as you will see at the end of this article.
But understanding the what (above) and the why (below) is important here.
Just like in our diversification tool, we feel it is important to know all of your holdings’ beta against the S&P 500.
The reason we like to do this is the S&P 500 is the big daddy index that all real traders care about.
It is the most liquid index thus, the most agreed upon index price in the world.
I am going to show you exactly how to find this information in a matter of minutes.
And for this example I will be using a portfolio comprised of the following stocks to see how much money can be made:
- 100 shares of $AAPL
- 100 shares of $IWM
- 100 shares of $USO
Very simple but you will see how you can use your entire portfolio as well.
What Are We About to Do?
In the rest of this article, we are going to take an example portfolio and…
- Compare each position to the returns of the SPY in order to get their beta…
- Combine all of the betas in the portfolio…
- Take the combined beta and use the expected move in the SPY to develop what the market thinks the example portfolio can make or lose in the next 7 days.
The entire time, we will be showing screen shots of a tool we have developed that does all the calculations for you.
Compare each position to the SPY to calculate it’s beta
By doing lengthy calculations, we find the SPY beta of each position.
Here we see our lovely positions and their beta to the SPY.
The way you should think about this is the following:
- 100 shares of $APPL is the beta equivalent of 36.83 shares of $SPY
- 100 shares of $IWM is the beta equivalent of 70.86 shares of $SPY
- 100 shares of $USO is the beta equivalent of 16.05 shares of $USO
After finding each holdings’ beta to the SPY, add them together.
This gives you the SPY beta of your entire portfolio in one number.
The top number here is our beta weighted portfolio to the SPY.
In this case.
100 shares of $AAPL, 100 shares of $IWM, and 100 shares of $USO combined together are the beta weighted equivalent of 123.74 shares of SPY.
Remember, these beta weighted positions are a result of the calculation comparing price movements over time.
Calculate the expected move in the SPY to know your potential profit and loss
Readers of this blog and customers of mine know that the VIX is not “The Fear Index”…
Rather it is just the expected move in the S&P 500.
Now that we know what our beta weighted SPY position is, we can calculate what the market thinks our profit and loss could potentially be during any timeframe.
The reason we can do this is because we are comparing apple’s to apple’s.
To find the expected move in the SPY, simply use the following equation:
SPY Price x VIX Price x the square root of (days/365)
Adding the days into the expected move equation is the only thing left!
How Much Can We Make?
That’s all you need to do!
- Get the beta of each position to the SPY
- Add up all of your positions to get a single number of beta to the SPY
- Using the expected move (VIX), figure out profit and loss potential
Remember, by combining 100 shares of $AAPL, 100 shares of $IWM, and 100 shares of $USO, we get a beta weighted SPY position of 123.74 shares.
In the next seven days according to our algorithms, the expected move in the SPY is $3.62 based off a $11.98 VIX.
That means, if we stress our beta weighted position by the expected move, we get a real market expectation of +/- $448.28 over the next week.
How Does This Help You?
I am sure you are thinking of a ton of ways this can help your portfolio.
Before you just run along and download the tool to see what you have…
I want you to consider something…
Consider where you were before you read this article.
You may have known the VIX was simply the expected move in the S&P 500.
But you did not have any reasonable context around your portfolio movement.
And now you do!
Understand that now you have a reasonable expectation of the potential profit and loss in your portfolio.
For any time frame imaginable.
And those expectations are not something you hear about on TV…
Or read in the paper…
I want you to remember that they are based off what the market thinks.
And knowing all of this puts you ahead of 99.99% of investors in the world.