This week’s Santa Claus surge, and corresponding collapse in implied volatility, is keeping us near the breakeven point as we approach expiration week, and putting even more pressure on our JNJ Supplemental Trades. Here’s where we stand as of 11:15 Eastern this morning:
- SPY Portfolio – Our current unrealized loss is about 1.4% of total capital at risk,and we have a net Model Portfolio delta of about 1.8%. Our delta in proportion to capital at risk is approximately 2.4%.
- JNJ Supplemental Trades Portfolio – Despite having sold two months of accelerating time decay, our JNJ portfolio has suffered from a collapse in implied volatility (“the market’s up, so we want to buy; but we’re cautious, so we want to buy blue chips”)—but we still have a good chance of making up the bulk of the current 15.8% unrealized loss. With JNJ at $62.53 and our beta-weighted portfolio delta under 2%, we’re close to where we want to be for now.
Here’s the P/L graph for the SPY trades (note that it shows the projected P/L for the Wednesday before expiration, for a more realistic expectation of our potential profit):
Likewise, the JNJ Supplemental Trades risk profile below includes the projection for 12/15:
Our latest research is focusing on volatility skew. Since the inception of the Calendar Options strategy, we’ve mainly been concerned about horizontal (time) skew. With two and a half years of data behind us, it’s clear that vertical skew plays an equal, perhaps greater, role in determining our outcome. After backtesting the strategy adjusted for this latest theory, I’ll post a summary of the results later this week.
In the meantime, we’re getting very close to an adjustment trigger for our core SPY portfolio. If SPY closes above $123.60 this afternoon, we’ll be on adjustment watch tomorrow morning. With JNJ near the mid-point of our risk curve, we expect to stand put for now.
In addition, we’ve entered our time window for January trades, and we’re planning to open our first position this afternoon.