Our positions for the June cycle were like Dr. Jekyll and Mr. Hyde. In general, it was another difficult month, in terms of falling implied volatility and, in the case of our IBM trade, an uptrend culminating in a whipsaw—but we still managed to break even: hitting the target profit for our SPY position made up for our IBM loss. And even though we underperformed the market for the month, we’re still outperforming handily over the long-run.
- S&P 500: +4.34%
- Dow Jones Industrials: +3.28%
- Russell 2000: +7.75%
- S&P 500 Covered Call Fund: +2.88%
- Calendar Options: 0.00%
- Note: the period measured is from expiration to expiration.
We calculate Calendar Options 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 Performance page. All performance figures include slippage (calculations are based on the actual prices at which the participating autotrading brokers were filled), but exclude any other transaction costs.
- SPY June/July 85/94 Double-Calendar: 15.79% return – There’s not much to say about this trade, and that’s a good thing. Despite a significant decline in implied volatility, we booked our target 15+ percent return in three weeks.
- IBM June/July 100 Calendar Spread: –11.30% return – Unfortunately, the sanguine review above doesn’t apply to our June IBM trade. A combination of upward-trending price and declining IV kept this position under pressure right from the beginning, and its fate was sealed by a whipsaw top, which triggered a late-cycle adjustment that later worked against us. Nevertheless, our strategy performed as intended—we managed our risk to keep this one loss from exceeding the profit we generally anticipate (and in this case, actually realized in the same month) from one winning trade.
Our July positions are down about 2.5%, but with Thursday’s sell-off, we’re back on target to outperform in what’s increasingly looking like it could be a losing month for the market. More important, we’re entering our time window for August trades, and we’re poised to benefit from the tendency of implied volatility to bottom in July.