Last month we made important changes to the Calendar Options service—changes aimed at reducing the odds of taking a loss like we did in January. The most significant change was to expand the scope of the newsletter, at least temporarily, to include double-diagonals, so that we’d have more opportunities to enter trades even when implied volatility is on the high side. (For readers unfamiliar with this exotic-sounding strategy, we’ve just made an excerpt from a Calendar Options post introducing the double-diagonal available in the public archives: Calendar-Condor Fusion.)
We can’t claim a one-to-one cause-and-effect relationship between the changes we made and our February performance (too many variables), but our results certainly improved:
- S&P 500: –9.42%
- Dow Jones Industrials: –11.06%
- Russell 2000: –11.90%
- S&P 500 Covered Call Fund: –11.89%
- Calendar Options: +6.31%
- Note: The period measured is from expiration to expiration.
We’re now calculating returns based on a model portfolio allocation. We initially size each hypothetical position at 25% of the total portfolio value at the beginning of the cycle; with a maximum of three trades per month, this leaves at least 25% initially in cash for adjustments, if needed. Note that the model portfolio is not intended as a recommended allocation or as investment advice.
To see how the performance of our model portfolio since inception compares to a portfolio that’s 100% long the S&P 500, take a look at our revised Performance page.
February Calendar Spreads
- SPY Feb/March Double-Diagonal: 15.22% return – Our first double-diagonal newsletter trade went just like it was supposed to. We deliberately made this position a little wide, to accommodate bear-market price swings, so we weren’t able to reach the 20% profit target we normally set for double-diagonals in less volatile markets. Nevertheless, closing out the Friday before expiration with a 15% profit isn’t bad for a month in which the VIX bounced around the 45 level, swinging as high as 57 and as low as 38.
- LMT Feb/March Calendar Spread: 8.66% return – This trade showed us what happens when a formerly stable stock comes unhinged. Uncertainty about what weapons programs the Democrats might cut sent LMT and other defense stocks on a roller-coaster ride, making an intraday range of twice the daily standard deviation priced into our options practically routine. And yet, at the end of the day, our position withstood the thrashing and was within reach of our 20% profit target—and then things got really interesting.
Ten days before expiration, we probed the market in the morning and were filled at a 21% profit. But by the time we could get out a trade alert, demand had dried up, dropping the bid under the stock, and our calendar spread. By the end of the day, the stock recovered, and we were able to find buyers at a price that gave us a 16.2% profit—but that’s not the end of the story. . .at the closing bell, we still had a portion of our closing order unfilled. So we decided to treat the position as if it were still open.
The next day, the selling resumed; LMT was driven down to our adjustment price, and per the rules of our strategy, we made an adjustment to get delta under control and stay in the trade. Under normal circumstances (no economic crisis or talk of forgoing expensive weapons purchases), this position would’ve looked pretty good to hold into expiration week—we were about delta-neutral on the Friday before, with theta of more than 14 on our two-lot base position. But we were also looking at rising gamma and vega, with a stock that had become rather unpredictable of late. So we closed the remaining portion of the position for a net return of 2.94% on total capital risked.
Given that we were able to liquidate most of our contracts with the first closing order (and all autotraded orders were filled), we’re combining the two closing trades to get our official return. The 8.66% we’re booking for this position is the capital-weighted average of the two closing trades.
While the S&P 500 is down more than 6% since February expiration—even after yesterday’s huge rally—we’re showing a modest but significant unrealized net profit for March. As we plan to book our March earnings, we’re preparing to enter our first April position—in all likelihood a double-diagonal—before the end of the week.