Yesterday afternoon we began closing September positions, on the defensive against a steep rally that appears bent on testing the full range of the SPX 1105–1130 resistance zone. We may have to take more aggressive action next week, but I’ll talk more about that after a look at the status of our positions:
- SPY September/October Double-Diagonal (97/102/109/114): Closed at a loss of 22.54% on total capital risked. When we reach our maximum allowable loss range earlier in the cycle, we typically try to manage the position as long as we can benefit from time-decay. A week before expiration, it often makes more sense just to stop out and let our other positions make up the loss.
- SPY September/October Double-Calendar #1 (108/111): This position was showing about a 12% gain on capital risked at yesterday’s close. Its base-position delta was about –43 (–8.2% of total capital at risk).
- SPY September Double-Calendar #2 (110/113): At the bell yesterday, we had an unrealized gain of about 16% for this position, and a base-position delta around +12.6 (2.4% of capital risked).
- SPY October/November Calendar Spread (112): Friday’s 3,6% drop in implied volatility kept this position at about breakeven (minus slippage). At the close it still contributed a little bit of positive delta to our portfolio of open positions (about 4.9 per base-position unit, or 0.9% of capital at risk).
Altogether, our SPY portfolio ended the week with a net realized and unrealized gain of approximately 1.2% of total capital risked (1.7% of capital risked on September trades and 1.5% of capital currently at risk). Our portfolio delta was about –1.5% of current risk (assuming equal-dollar positions). That’s nearly neutral, but gamma and vega are the real concerns next week.
Our strategy, ideally, is to exit on a pullback after letting our short premium decay for another two or three days (or less, if we happen to get a sell-off Monday or early Tuesday), but we’ll need to be careful next week about the current uptrend. The market is overbought short-term, and we saw a little bit of distribution intraday Thursday and Friday (though daily volume on the NYSE was near its 12-month lows)—but the intermediate-term trend is undeniably bullish. While Friday’s SPY $111.48 close wasn’t quite at the price-level risk-management threshold we set for the 108/111 double-calendar, we don’t want to be on the wrong side of the market during expiration week. If the Big Dogs come back from the Hamptons in a buying mood, we might want to trim our delta exposure a little more on Monday to optimize our risk curve for what could be a volatile week.
(Aside: We’ve done a lot of trading this month, and I’d like to know what subscribers think about the frequency of our trades. Calendar spreads are, by nature, relatively volatile, and we’ve already done just about everything possible to avoid making this, as a member once put it, “the daily adjustment club,” without compromising risk-management. [Despite some options-education newsletters' claims, the options market is not a magic ATM.] So the real question is, are the Supplemental Trades a valuable part of the Calendar Options service, or are they, and the related e-mail alerts, too much? Let me know by sending an e-mail to email@example.com.)
The Real Thing
The picture for our Supplemental Trades portfolio is similar, only even sharper. KO is on the edge of breaking out from a huge, multi-year cup-and-handle pattern…or falling back from a point of major resistance. We’ve closed one position near our loss-level risk-management limit and have two September positions still open. The stock is in an uptrend, and we’re sitting on a growing pile of gamma and vega. On the other hand,…
We’re still short a lot of September premium, making the potential reward for riding out the next few days worth the risk—but it may be a good idea to optimize our P/L curve on Monday. Ex-dividend should, in theory, discourage buyers and/or take a bite out of the September put premium; in reality, it could end up being a wash after the market adjusts the October premium as well. We’ll see where things stand Monday morning and act (or not) accordingly.
In the meantime, here’s the status of our Supplemental Trades portfolio just before the bell on Friday:
- KO September/October Double-Calendar #1 (55/57.5): Closed at 19% loss on capital risked.
- KO September/October Calendar Spread (57.5): We had an unrealized gain of 9.87%, with a bearish base-position delta of about –53 (approximately –25% of capital at risk).
- KO September/October Double-Calendar #2 (57.5/60): This position closed the week with a 12.5% unrealized gain and a base-position delta of +10.8 (about 7% of capital at risk).
The net for our September Supplemental Trades portfolio (equal-dollar positions, not including commission costs) was about breakeven, at approximately 0.3% of total capital risked. As a percentage of capital currently at risk, we’re a bit more on the plus side, at about 0.4%. We closed the week with a negative delta bias of about 8%, but again, gamma and vega are our primary concerns: our portfolio gamma is about 11% of total capital at risk; vega is about 9%.
And our strategy for next week is similar as well—we may exit or roll up part of our position at 57.5 to reduce our delta exposure (depending on where the stock is trading and what the options premium looks like); we’re looking, ideally, to exit both open positions on pullbacks; and our primary risk would be the stock price grinding higher, with falling implied volatility.
This is what our KO portfolio risk curve looked like near Friday’s close:
I hope members appreciate the detailed position and market analysis heading into expiration week, and, again, please let me know whether you think the number of trades, posts and e-mails is too much, too little, or about right.