Our core SPY strategy—with tighter risk-management rules—was back on track in December, despite headwinds from a short but fairly sharp pullback, followed by a sharper rally and breakout to new post-crash highs, and a corresponding drop in implied volatility late in the cycle:
SPY December/January Double-Calendar #1 – Closed for a 30.6% return on capital at risk.
SPY December/January Calendar Spread (Adjusted) – This position served its function as a downside hedge, with the loss of 19.7% of total…
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…
Despite tracing out a range of nearly 30 points, the S&P ended the week only 11 points higher. Similarly, our one open position went almost nowhere, due in part to a 4% drop in SPY implied volatility (the VIX, which gives more weight to OTM puts, fell 8%). In the final half-hour of trading Friday, we were seeing a small gain, with the mid-price holding around $2.40 or higher—but as bids dried up in the last five minutes, the price…
Our September KO Supplemental Trades went very well, with an average return per trade of 8.99% on total capital risked and a Model Portfolio return of 6.08%. Even so, a few members wrote in to say that they felt overwhelmed by the frequent e-mail that resulted from opening and managing a full portfolio of Supplemental Trades in addition to the core newsletter portfolio. Our new practice of sending advance Trade Notices no doubt contributes to Inbox Overload Syndrome as well,…
Yesterday afternoon we began closing September positions, on the defensive against a steep rally that appears bent on testing the full range of the SPX 1105–1130 resistance zone. We may have to take more aggressive action next week, but I’ll talk more about that after a look at the status of our positions:
SPY September/October Double-Diagonal (97/102/109/114): Closed at a loss of 22.54% on total capital risked. When we reach our maximum allowable loss range earlier in the cycle,…
As of 2:35pm edt, the premium in the KO Sep 57.5 calls was about $0.25—still well below the $0.44 second-quarter dividend. It’s a little early for a dividend arbitrage play, but we want to make sure we avoid assignment, just to keep everyone on the same page. Absent a big sell-off/jump in IV, we’re planning either to close our call position at the 57.5 strike or to roll it up in the last hour of the session today, depending on…
Last week we showed how experienced, relatively risk-tolerant calendar traders sometimes can recover a significant portion of an unrealized loss by keeping positions open into the end of expiration week. We’ve compared expiration-week gamma with bull-riding, and that’s why we try to avoid it—especially in our core newsletter portfolio. Nevertheless, with an accommodating risk profile and an expectation of mean-reversion, the risk can be worth taking if you’re an experienced, active trader with plenty of capital available for hedging.
After…
Last week we closed out our August SPY position for a 10.42% profit, which translates to a Model Portfolio gain of 2.6%. This might not look like a significant return, but from a risk/reward perspective, it’s very good performance for a month in which volatility risk remained relatively high. Even after commissions (assuming you’re not letting your broker get away with charging you more than $1.00 per contract), it represents an APR of more than 20%—while risking only a quarter…
Thursday, December 16, 2010
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