Welcome to Trading With Larry Benedict

If this is your first time reading Trading With Larry Benedict, thanks for joining us. You can catch up on all previous issues right here.

During this two-month series, you’ll hear from one of the world’s very best traders and hedge fund managers… Larry Benedict. He’ll detail everything from the trading methodology that’s made him a fortune over the years, to stories from the trading pit that you won’t hear anywhere else.

Any questions or feedback? Shoot us a note anytime at [email protected].

Daina’s note: On Friday, Larry introduced readers to the number one pitfall novice traders fall into: They don’t “earn their risk.” 

As a young trader on the floor of the Chicago Board Options Exchange, Larry had to blow through his own money a few times before learning this… 

So today, he paints a clearer picture of proper position sizing and what it means to “earn your risk” as a trader…

Daina Schnese: When we ended our discussion on Friday, you brought up “earning your risk” as a trader. What do you mean by that?

Larry Benedict: Essentially, if you have a pile of capital that you’re comfortable with, and you’re trading well that day or week, you can take on more risk.

On the flipside, if you’re just starting out and don’t have a base of capital you feel comfortable with… or you’re not trading well that day or week… you shouldn’t take on more risk.

It goes back to what I talked about last time… You never go broke taking a profit. Always look to put a P [profit] on the page. Then, once you’ve built up a strong foundation, you’ve earned the ability to take on more risk. It’s really that simple. 

Daina: You’ve obviously earned your risk as a trader. Have you made some “risky” moves with large position sizes in your career? And how did those play out for you? 

Larry: I made my big mistakes early on in my career… And it cost me all of my money, on several occasions. 

It really came down to a bunch of silly mistakes. One of them was position sizing. I would bet way too much on one risky trade, and wipe myself out. After a few times doing that, I began trading smaller lots. 

But once I got further into my career and had a solid foundation of capital, I began to take on larger position sizes. At first, I was only able to handle one option contract – which controls 100 shares of stock. Then I started trading five at a time. Then 10… 50… 100… then 1,000. 

I was successful because I never looked at any position differently. It was the same mentality, no matter the size of the position. I built up my capital base bigger and bigger, and slowly earned my risk. 

One of the larger positions I took was in Bank of America, in early 2009. This was back when Bank of America was going bankrupt. We were dealing with the financial crisis. 

So, I saw an amazing opportunity. I bought $108 million worth of Bank of America in one shot. I went in and got 27 million shares at $4 each – close to the bottom.

Daina: How much money did you end up making on the trade? 

Larry: I made somewhere between $3 million and $5 million on that one. I’ve done so many trades in my life… I average around 70 a day. So, you’ll have to forgive me, but I don’t always remember exactly how much I’ve made on any one particular trade…

And on a position that large, $3-$5 million doesn’t seem that big in comparison. But, over my career, I’ve made a few million here, a couple million there… and over time, that adds up pretty quickly.

Daina: Were you worried about a position that big during the financial crisis? 

Larry: No, not really. Like I said, through my years of trading, I’ve created a mentality where I don’t get nervous based on position sizes. Every position size is the same to me. It’s how I’ve done as well as I have. Now, I might get fearful that something could go wrong… but it has nothing to do with the size of the position. 

That was an opportunity that you just won’t have again. There was a global financial crisis happening, and I saw the perfect opportunity to trade it. It’s actually a good example of how as a trader, you can make money no matter what the market is doing. The best environment for me to trade in is high volatility, a lot of uncertainty, and a lot of market movement. 

But, I was running my hedge fund that year and honestly, our biggest fear wasn’t that we’d lose any money trading. Which is why I felt comfortable taking on that large of a position.

Daina: Well, if you weren’t afraid of losing money trading during the ‘08 crisis, I’m interested to know what you were fearful of… But we’ll save that for the next time we get together. Thanks for your time today, Larry. 

Larry: Great, no problem. 

Daina’s note: During our next installment, Larry will talk about his biggest fear surrounding the 2008 financial crisis – and why it had nothing to do with trading. He’ll also touch on the other key emotion involved in trading: greed. 

About Larry Benedict…

Larry has been described as the “Ichiro Suzuki” of trading (after the Hall of Fame baseball player who had an uncanny knack for scoring). And he has been likened to “Rain Man” when it comes to making money, because – with him – it just happens, quickly… and repeatedly, sometimes without plausible explanation.

From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year. That’s through the 2000 dot-com bubble and the 2008 financial crisis. (It wasn’t until 2011 that he lost, and even then, the fund was down only 0.6%.)

That’s why we’re publishing this limited-edition interview series over the next couple months. When we saw what Larry could offer to everyday investors like you and me, we knew we had to share everything we could with you.

If you have any comments, questions, or suggestions about this free e-letter, please drop us a line at [email protected].

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