After Thursday’s Update I thought it unnecessary to review the risk/reward equation for our open position intraday Friday even as we headed into a potentially volatile, news-driven weekend. Assuming we’ve held onto our entire stake in the current May trade, our capital at risk is still small in proportion to our total Model Portfolio allocation. Equally important, our P/L profile couldn’t be more ideal: Total base-position delta at Friday’s close was almost +68—enough to offset any sharp drop in implied volatility resulting from a Eurozone debt-crisis deal, and vice versa (spiking implied volatility should help buffer the delta loss from potential panic selling). And that doesn’t even account for the nice profit cushion we’re sitting on:
- In the final minutes of trading Friday, our May/June 120 call calendar was selling for $1.10, which represents an unrealized gain of 35% on capital at risk and a Model Portfolio gain of 8.75%. Offsetting our positive delta bias was a base-position vega of approximately +143.
As of 10:15pm edt, S&P futures are showing no sign of any dramatic move in either direction. A lot could change by the time US markets open tomorrow morning, but again, we’re about as well-positioned as we could possibly be for the current environment.
On a side note, our IBM Supplemental Trade closed Friday at about $1.32, for a 17.9% paper gain in just one week. As with our core newsletter portfolio, we were long delta in proportion to our vega risk, and IBM tends to be less volatile than the S&P 500—so we feel relatively secure in this position as well.