Weekend Portfolio Update

[We publish updates each weekend on the members-only areas of our site. Our comment for this weekend is below; the strike prices of our open positions have been hidden.]

The markets still seem to be in a bottoming process.  Unless the S&P 500 can hold the 800 area, we see no reason to expect any major multi-week rallies.  Our directional bias is down-to-sideways, and it would take a high volume, multi-month rally coincident with some positive economic news to change that thesis.  Our volatility forecast is for a VIX in the 30-50 neighborhood for all of 2009, with some occasional upside spikes.

That’s bad news for investors, but it’s good news for us.  Contrary to what you might think, a highly volatile secular market environment is actually an ideal setting for the options spreads we trade in our two newsletters.  It’s much easier to sell volatility when it’s high and buy it back when it’s low than it is to wait out week after week of grinding bullish action.  Ironically, we saw a lot of reader interest in selling premium during the end of the last bull market, and are seeing less interest now.  A typical comment we receive is, “iron condors profit when volatility declines (short vega), but I don’t see volatility declining given this bad economy.”  This sort of remark misses the point by conflating two very different timeframes, namely the level of volatility in the market over several months/years, and the life of an individual trade.  The reason we prefer tumultuous markets is that we have more opportunities to exit and enter trades as implied volatility moves around.  So contrary to public sentiment, the worst time to be selling premium is during a raging bull market (which is precisely when all those covered call funds launched) and the best time is amidst the uncertainty of a bear market.  It usually pays to fade public sentiment.

In any case, how about those February trades!

SPY February Iron Condor xx/xx/xx/xx

This trade is currently priced at about $0.43, for a paper gain of about 14% on capital risked. It carries a delta bias of about 7.5 per 1-lot position.  We are facing a gap down at Monday’s open, and as this is the most vulnerable position, we may close it out first, possibly early this week.

IWM February Iron Condor xx/xx/xx/xx

This trade is currently priced at about $0.22, for a paper gain of about 22% on capital risked. It carries a delta bias of about 2.25 (SPY weighted) per 1-lot position.

SPY February Iron Condor #2 xx/xx/xx/xx

This trade is currently priced at about $0.54, for a paper gain of about 13% on capital risked. It carries a delta bias of about -3.4 per 1-lot position.

Notice that the third February trade we added has played a crucial role in reducing our directional exposure over the past week.  We will begin looking at possible March positions this week.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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