In Part I, our Performance Comparison for May showed an average return per trade of 6.40%, with a model portfolio* return of 5.13%—compared to the S&P 500′s gain of 1.53%. Here are the trades that got us there:
- DIA May/June 68/73/84/89 Double-Diagonal: 2.29% return – For the first couple of weeks, it looked like this trade was going to be smooth sailing right to our 15% minimum profit target—but as the market entered the second leg of the spring rally, DIA reached our upper adjustment trigger. Once again, though, our trading rules kept us out of a whipsaw adjustment, and instead of taking defensive action, we boosted the trade’s profit potential by rolling up the put diagonal. As DIA approached the upper adjustment point again four days before expiration, we were able to close the position with a small profit.
- DIA May/June 78/85 Double-Calendar: 6.83% return – We added some vega to our portfolio with this trade when the VIX hit support in the 34–35 range. The position held up well through the mid-April to early-May rally, but as we came into expiration week with significant negative delta in a strong market, our emphasis on risk-management dictated that we lock in a profit short of our target.
- IBM May/June 100 Calendar Spread: 10.07% return – After implied volatility turned up on April 20, we were looking to add vega with a single-calendar position on an individual stock. The IBM 100 put calendar met all of our entry criteria at the time, and the stock is generally a very good calendar-spread candidate. But IBM rallied strongly after the company announced that it was raising its dividend by 10%, and we compensated for the additional upside risk by tightening our risk-management rules. An adjustment was triggered the day before ex-dividend—a significant complication; nevertheless, the adjusted position exceeded a 10% return on total capital risked when we closed it a few days before expiration.
As we head into the final days of May, we’re about two weeks into our two open trades for June expiration. If we see a clear upside trend reversal in the VIX, and an attractive calendar-spread opportunity arises, we may enter a third June position before the week is out; otherwise, we’ll start evaluating July trades next week.
*Model portfolio does not represent a recommended capital allocation. It is intended solely as a realistic way to measure of Calendar Options performance.