Sometimes staying in the game takes deep pockets, and as the saying goes, “The market can stay irrational longer than you can stay solvent”. XLE’s 3% drop today has crushed our May Supplemental Trades portfolio…but we have an opportunity to make back a good portion of this month’s unrealized loss—at the cost of taking on additional risk.
Make no mistake: Any member who has real cash on the line and who doesn’t have the means and/or desire to accept the…
Veteran subscribers have been here before, though not quite on this scale. Some confluence of outlier events near expiration—in this case, QE2 exuberance, followed by Euro-debt crisis, followed by anticipation of an Ireland bailout, a better than expected Philly Fed report and a successful GM stock sale—sends our calendar-spread portfolio into a tailspin. I’ve been reviewing the sequence of market moves that led to the November loss, as well as the actions we took in response, and will continue to…
In addition to the regular performance data, I have a couple of interesting items to comment on for this quarterly review. First: for anyone who thinks that global equity markets may have some choppy periods ahead, this is an excellent opportunity to start thinking seriously about the role non-directional strategies should play in your portfolio. Second: we’ve added a dynamic delta hedging component to the newsletter to improve the purity of our volatility trading and to reduce unwanted…
As I’m sure few members failed to notice, we took a wild ride this afternoon. SPY bottomed out at $105—more than $11 below where it opened. Old-school fundamental analysts went straight to the Correlation Game, blaming fears of European debt contagion, while those who understand how the market works under the hood pointed to a possible fat-finger trade that destabilized the Program-Trading Matrix. As a mathematician looking at a 512-tick chart of SPY during the Event,…
After Thursday’s Update I thought it unnecessary to review the risk/reward equation for our open position intraday Friday even as we headed into a potentially volatile, news-driven weekend. Assuming we’ve held onto our entire stake in the current May trade, our capital at risk is still small in proportion to our total Model Portfolio allocation. Equally important, our P/L profile couldn’t be more ideal: Total base-position delta at Friday’s close was almost +68—enough to offset any sharp drop…
In the March 31 Portfolio Update, we took up the question of whether it might be a good idea to change the Calendar Options strategy for different market environments. The answer was no, primarily because our market-neutral income strategies are based on statistical probability—i.e., by tilting the odds in our favor, we expect to profit over the long-run if we apply the strategy consistently.
Nevertheless, extreme conditions can shed light on how a strategy might be improved to…
As of 11:13am (Eastern), KO is trading under $55, failing to confirm yesterday’s close above our $55.20 adjustment threshold. Nevertheless, as some of you no doubt have noticed, our long May options have decayed to about half their original value, reducing the current dollar allocation of both April/May Supplemental Trade positions to about what we originally allocated to a single position. This leaves us enough cash for as many as two more entry trades for the April cycle.
As long…
In Position-Sizing 101, I noted that we teach members to allocate capital in proportion to risk. One measure of risk is dollar size, but others are important to consider when apportioning capital among different strategies. I think it’s fair to label speculative strategies, per se, as riskier than income strategies (such as Calendar Options and Condor Options) that focus on implied volatility and the statistical distribution of market fluctuations. Among the latter, the two main risk factors to consider…
The most frequent question we get from new subscribers is, “I have $xxxx…how much of it should I allocate to your strategy?” Our newsletters are educational publications, not investment advisories, so I can’t tell any member how much to put into this or that strategy or position—but there are some guidelines you can use to help decide what’s right for you.
First and foremost, never risk more than you can afford to lose. And by “risk” here, I mean the…
With yesterday’s 1.4% gain in the S&P, our February positions came back from the edge of our loss-level risk-management threshold: at the bell, the adjusted SPY Feb/Mar Double-Calendar was trading at an unrealized loss below 24%, and the adjusted SPY Feb/Mar Calendar Spread had a paper loss under 20%. Our aggregate portfolio delta (base-position weighted) was about +65. While, technically, that takes us off intraday adjustment watch, both positions would again be back past the 25% loss-level threshold if SPY…
Wednesday, May 11, 2011
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