Last week we closed our remaining March SPY positions, booking a 26.8% average return per trade for this cycle. Here’s the breakdown:
- SPY March/April Double-Calendar #1 – Closed for a 35.44% return on capital at risk.
- SPY March/April Double-Calendar #2 – Closed for a 3.82% return on capital risked.
- SPY March Butterfly Hedge – Closed for a 41.18% return on capital risked.
In Model Portfolio terms, we logged a gain of 16.48%—not quite the 18% return we were seeing at the mid price at the time we put in our orders last Thursday, but still in the upper range of backtested returns for the latest upgrades to our strategy. The even better news is that it puts our Model Portfolio at a new all-time high—after risking less than 75% of our capital—in a period where the market pulled back to neutral and is still dropping.
The not-so-good news is that our Supplemental Trades have been battered by whipsaw after whipsaw. Members who heed our disclaimer that Supplemental Trades are riskier than our core newsletter portfolio presumably kept their positions small, and therefore still came out with a substantial net profit between the two portfolios. Nevertheless, this month’s IBM trades certainly provided many trading lessons.
Event Risk is the Enemy
When trading options on individual stocks, we’re careful to avoid known events—in particular, earnings announcements and, after enduring a few negative experiences, dividends. Of course, there are always unpredictable events; and many, if not most, calendar traders don’t let that stop them from working company stocks. But combine that with the research needed to check every candidate for any possible known event, such as this month’s IBM investor conference, and we’re more inclined than ever to focus on ETFs and avoid trades on individual stocks.
Before continuing this discussion, let’s take a look at our current Supplemental Trades status:
Only a small portion of our afternoon order was filled today, so I’m posting two risk profiles. First the one without this afternoon’s Calendar Hedge adjustment trade:
By the time the afternoon rebound was over, our current/previous position looked pretty good. Portfolio delta in proportion to capital at risk was a virtually neutral 0.34%, and net vega was only about 1.63% of total capital at risk.
That said, anyone filled on the final-hour trade is in fairly good shape as well. Portfolio delta and vega, as a percentage of capital at risk, are about as close to zero as we can get. Here’s our risk profile after the late-day adjustment:
So whether or not one had this afternoon’s order executed, we’re looking at a P/L graph with the potential to recover much of our current unrealized loss. On the other hand, I don’t want to set unrealistic expectations…despite its 0.73 beta, IBM has been more volatile than the S&P 500 lately. Volatility usually settles down in the latter part of expiration week, but there’s no guarantee. Anyone in this trade who’s been kept awake a night worrying about the potential losses should reduce of flatten their position in our March Supplemental Trades portfolio.
So Are Stocks a Bad Idea for Calendar Spreads?
Just to be perfectly clear: It can be very profitable to trade calendar spreads on company stocks. If you know a company well and are informed about upcoming events, calendar spreads (traded in accordance with the parameters of our strategy, or in line with your directional bias) can be very lucrative. One can increase the chances of success by trading calendars on multiple stocks, to dilute the impact of any one trade that goes wrong.
Nevertheless…we’ve found that the risk/reward/time/effort equation favors concentrating on pre-built baskets of stocks—i.e., ETFs. Sure, we’ll continue to post Supplemental Trades on individual stocks from time to time, but this month’s loss emphasizes the risk involved.
And What About April?
Current implied volatility, and the volatility thereof, is preventing any new entry trade signals. If IV continues to trend up, we may open new positions on the dips. But if IV starts to fall, or skyrockets, our strategy rules may keep us in cash this month. In either case, we’ll continue scanning for opportunities to enter Supplemental Trades in sector ETFs and individual stocks, as well as in our core SPY strategy.