Along the same lines as our earlier SPY butterfly hedge, we’re adding to yesterday’s ‘fly downside hedge position in XLE, as follows:
Day limit order
Buy to open 1 XLE May 79 put
Sell to open 2 XLE May 75 puts
Buy to open 1 XLE May 71 puts
for a net debit of $1.64 or better.
Note that in order to achieve our target portfolio-delta adjustment, we’re allocating an equal-dollar position to this trade—in other words, if we’ve allocated $1000 to each opening calendar trade, we want to trade the number of contracts needed to match that $1000 risk. Also note that as a Supplemental Trade, this order will not be autotraded.
Analysis: With this trade we’re cutting our delta bias, beta-weighted to SPY and in proportion to total capital at risk, from approximately 2.8% to about 1.5%. That prior 2.8% wouldn’t normally trigger a risk-management alert, but we also factor in a proprietary volatility-risk adjustment that gave us a clear signal to take action.
On the other hand, we’re standing by our thesis that XLE is extremely oversold in the short-term, and the risk of a whipsaw rebound is a major concern—which is why we’re again being somewhat conservative with this adjustment. But if XLE appears headed for a close below $74.90, we’ll take additional risk-management measures.
NOTE: Supplemental Trades are optional and primarily intended for more experienced/risk-tolerant subscribers. They are not autotraded, and have no bearing on our core newsletter portfolio; however, we follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle if they wish to match our risk-management profile.