As of about 1:10pm Eastern, our portfolio of open positions was showing an unrealized loss of approximately 2.7% on total capital at risk, for a Model Portfolio return of about –1.6%. Delta is neutral, and vega is up slightly from Friday, at about 6.4% of capital at risk. Considering the fact that we’ve been through one of the steepest four-month sustained drops ever recorded in the VIX (perhaps the steepest, depending on how you measure it), our continued ability to avoid serious losses in a long-vol, market-neutral strategy is remarkable proof that our model of continuous improvement based on lessons learned at market extremes has produced a robust approach to trading options for income.
That said, crowing about the past is not the ticket to future returns—so let’s take a look at our current risk profile and strategy for managing risk into expiration week:
Rapid changes in volatility skew (taking all dimensions into account—strikes, expiration dates, puts vs. calls) has made it difficult to pin down precise numbers for unrealized P/L, much less projections for risk-management price thresholds. Our best estimates for adjustment triggers in SPY share price currently are approximately $132.25 and 135.35. Predicted probability of profit is holding steady at around 40%.
Nevertheless, as the P/L graph below shows, gamma (displayed in the sharpness of the curve around the center strike) is becoming our main concern. Increasing gamma means we have to be more nimble as we approach expiration week, and to start making gamma a larger consideration in our adjustment trades.
Looking ahead, our plan for adjusting to the upside combines rolling up the calendar position at 126 and then, if necessary, moving up the center of our calendar butterfly hedge. If we get a sell-off instead, our positive vega should provide a cushion—in any event, we can sell an iron condor (adjusting the Feb/Mar calendar butterfly) to capture any spike in implied volatility.