Our positions for the June cycle were like Dr. Jekyll and Mr. Hyde. In general, it was another difficult month, in terms of falling implied volatility and, in the case of...
As of Friday’s close, none of our July Calendar Options trades had reached our profit target of 15% to 20%, although our overall portfolio was showing a small profit. With expiration week upon us, the theta of our positions has become very attractive—but our gamma risk is reaching the edge of our comfort zone, and the market waters could be tricky to navigate as the week goes on. So we’re looking to close our July trades within the next few…
Despite having been burned by last week’s colossal head-fake, we were hoping to avoid re-adjusting our RTH double-calendar—but Friday’s drop of 2.7 times the ETF’s one-day standard deviation was not a good sign. On Monday RTH fell through its 50-day moving average and closed just pennies below it. After bouncing off the 200-day MA yesterday, RTH is down again this morning and trading below our theoretical break-even. We’re once again approaching our maximum loss, so we’re making the following adjustment:…
Apparently investors are worried enough about the strength of the U.S., and global, economy and financial system that EEM continues to fall even with the energy and materials sectors (which feature prominently in the EEM portfolio) going gangbusters. The fund is now trading below its 20-, 50-, and 200-day moving averages, and it’s crossed our projected lower break-even point ($143.70).
With increasing implied volatility, the lower break-even actually has moved down almost $4—but we want to adjust this trade now…
We’re probably not the only ones who thought yesterday’s big rally was strange. Oil was up and so were airline stocks? Bond yields were down but the dollar was up? More people are pinching pennies by shopping at Wal-Mart and Costco instead of Kohl’s and The Gap, and investors pile into retail?
It didn’t make sense to us, either, but the market can behave irrationally long enough to do serious damage to our portfolio if we don’t maintain our discipline…
In Part I of our series on Calendar Options adjustments, we explained why adjusting calendar spreads is often a good idea, and we showed how an adjustment can turn a position that has gone against us into one that’s even more likely to reach our profit target than our initial trade. But how do we determine when it’s time to make an adjustment?
The smart answer is, when we think the odds of reaching our profit target are better…
Robust May sales reports from discount chains Wal-Mart, Costco and BJ’s sent RTH rocketing higher this morning, despite negative numbers from Target and most of the major department stores and apparel retailers. The ETF is now trading above the theoretical break-even for our adjusted June/July double-calendar (the upper break-even has fallen below $98 due to declining implied volatility).
Although it’s currently more than $0.50 off its intraday high of $99.10, it looks like RTH will close above the…
Volatility was back today. . .for how long, we don’t know—but for the time being it’s giving our Calendar Options portfolio a boost. Price strength in the equities underlying our trades, and the drop in perceived risk that accompanied it, had us temporarily on the defensive. But now one of our positions is closing in on our initial profit target, and the others are well-placed for a comeback. Here are the details:
EEM – After three weeks and one adjustment,…
IBM rallied sharply yesterday, but volume was light until the final hour of trading. Nevertheless, the rally continued today, pushing the stock to a breakout above its May 14th high. With IBM trading beyond our projected break-even point of $128.75 and within striking distance of its year 2000 high, we’re rolling half our calendar-spread position at 125 up to the 130 strike, as follows:
+2 IBM June 125 puts
-2 IBM July 125 puts
for a net credit…
Big retailers are seeing big selling in their stocks, and it’s putting pressure on our June/July RTH double calendar spread less than a week after we opened the trade. With RTH having dropped more than 3½ points already this week, and a long holiday weekend coming up, we thought it would be wise to reduce our risk by rolling half of our call-spread position at the 100 strike down to a put spread at 90, as follows:
+1 RTH June…
With its 30-day historic volatility ranging between about 20% and 30% over the past six months, and implied volatility tending to stay above historic volatility, the Retail HOLDRS ETF (RTH) is a good candidate for a calendar spread. Implied volatility for RTH currently rests near its nine-month low. Moreover, July-expiration options are available for RTH, which means we could buy a one-month spread and avoid the higher vega that’s currently punishing our EEM June/Sept spread.
The Thesis
With 36…
Saturday, July 4, 2009
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