After a flat Friday, our unrealized loss on total capital at risk, as of the closing bell, had narrowed to about 2%. Since we’re keeping a tight rein on risk and are almost 2/3 in cash right now, the current paper loss as a percentage of our Model Portfolio is less than 0.7%.
Members who’ve been with us for a few months or more know that it isn’t uncommon for our portfolio to be showing an unrealized loss at this point in the expiration cycle (lately more the rule than the exception, in fact, with market volatility—and distortions in implied volatility—running unusually high). What’s important is that we keep any current unrealized loss small relative to our potential monthly gain (check), and that our delta and vega risk remain within the boundaries defined by the strategy rules…check:
As of Friday’s close, portfolio delta and vega, in proportion to total capital at risk, were virtually neutral. Because risk-management is more about controlling the odds of losing capital than about big returns, the table at the right shows projected break-evens and probability of profit the Wednesday before expiration (one day later than I used in the previous, trade analysis). According to options-pricing models, that extra day would eat into our profit if SPY is in the upper half of our profitability range—but it also would increase that range enough to push the probability of ending the cycle with a profit up to nearly 65%.
Here’s the graphical representation of our current P/L curve (white) and projected return the Wednesday before expiration (red):
Our strategy going forward remains the same as it was last week:
- Hedge downside risk as necessary with additional butterfly positions and/or adjustments to current positions;
- Unwind the negative delta in our remaining hedge position when it’s no longer needed; and,
- Add new calendar or butterfly positions (depending on implied volatility) above the market if we get a strong, sustained rally.
As always, I’ll send out notice of any planned trade as far ahead of time as possible.