A product recall from JNJ has magnified the effects of dismal market sentiment across the board to send the stock down more than 1-1/3 percent. We would have preferred to fill out our position at the 62.5 strike under less volatile circumstances, but with our two open single-calendar positions showing an unrealized loss of about 30% on combined capital currently at risk, we’re adding another position below the market for protection, as follows:
Day limit order
Buy to open…
At about $63.75, JNJ is priced right in the middle of our two open strikes, which means we can roll out our short November positions, bringing in a credit and leaving us with a December/January (unbalanced) double-calendar. There are two ways to place this order—as one custom order or as two separate calendar-spread orders.
First, the separate orders (note that these are credit orders):
Buy to close the JNJ Nov 62.5 puts
Sell to open the same number of…
With JNJ close to $63, we’re opening the following Supplemental Trades position to offset our downside risk:
Day limit order
Buy to open 4 JNJ Jan 62.5 puts
Sell to open 4 JNJ Nov 62.5 puts
for a net debit of $1.31 or better.
Note that 4 contracts is our base position for calendar spreads. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions. Also note that matching…
As of mid-day Wednesday, the market reversal, though it may turn out to be short-lived (SPX 1200 is the level to watch), has given our core portfolio a boost, while dealing our JNJ Supplemental Trades a temporary setback. Here’s where we stand as of about 1:45pm Eastern:
SPY November/December Double-Calendar #1, Adjusted (119/123): This position is showing an unrealized loss of about 1.3%, and its delta, at about –2.4% of capital at risk, is well within our risk-management range.…
We’re opening the following Supplemental Trades position this afternoon:
Day limit order
Buy to open 4 JNJ Jan 65 calls
Sell to open 4 JNJ Nov 65 calls
for a net debit of $0.62 or better.
Note that 4 contracts is our base position for calendar spreads. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions. Also note that matching our Model Portfolio risk profile requires a risk-based allocation strategy—i.e.,…
Forward volatility skew increased even more this week, keeping a damper on our unrealized P/L, but back-month implied volatility is higher, which is always good for our strategy. The status of our open positions just before the bell today showed distinct improvement:
SPY November/December Double-Calendar #1 (114/119): This position was trading around $2.24, for an unrealized loss of 5.9%. Base-position delta was about –14.3, or –3% of total capital at risk, and base-position vega was approximately 25, or 5.3%…
A shift in perceived risk toward the short-term has put a drag on our currently open positions:
SPY November/December Double-Calendar #1 (114/119): Heading into the close Friday, this position was mid-priced at about $2.17, for an unrealized loss of approximately 8.8%. It carried a base-position delta of about –9.3, or 2% of total capital at risk, and vega of about 23, or 4.8% of dollars at risk.
SPY November/December Double-Calendar #1 (117/121): This position ended the week trading around…
Implied volatility—at least for certain stocks—is back to a level where we’re comfortable entering multiple-month spreads. Now that the market has had a couple days to digest JNJ’s earnings news, we’re opening the following position:
Day limit order
Buy to open 2 JNJ Jan 65 calls
Sell to open 2 JNJ Nov 65 calls
Buy to open 2 JNJ Jan 62.5 puts
Sell to open 2 JNJ Nov 62.5 puts
for a net debit of…
Tuesday, November 23, 2010
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