In what the headlines are trumpeting as the best week for the market in three years (some have claimed it’s “one of the best weeks ever [emphasis mine]”, our current risk profile has suffered more from the plunge in implied volatility than from the move in underlying SPY shares. While that might not sound like a good thing, it means that we’ve been managing delta risk prudently and, considering how far IV has fallen, vega risk as well. IV for…
Wednesday, January 5, 2011
Around 2:30 it was starting to look like the bulls went home early, but buyers have stepped in since then, leaving little doubt that some hedging is called for this afternoon. We need to be careful here, however—the S&P is pinned in overbought territory and creeping into an area of strong technical resistance defined way back in 2008. Instead of taking on the vega risk of another full position, we’re neutralizing our portfolio delta with a fractional hedge position, as…
Thursday, December 23, 2010
The strategy changes we’ve been developing and testing since last month’s drawdown are proving to be enormously beneficial. We’ve completed backtesting from October 2009 through December 2010, and the difference between what I’ll call the new “Vega-Hedged Strategy” and the existing strategy’s historic performance is astonishing. Our average quarterly return for the past 15 months was 7.95%, and the standard deviation of returns was about 10%. The Vega-Hedged strategy, with delta-based risk-management triggers, showed an average quarterly return…
Monday, December 13, 2010
We’re between a rock and a hard place today with our JNJ Supplemental Trades portfolio, and it looks like our best option for paring risk is to close out part of our position at the 62.50 strike. We’re entering the following order as the session draws to a close: Day limit order Buy to close 4 JNJ Dec 62.5 puts Sell to close 4 JNJ Jan 62.5 puts for a net debit of $0.55 or better. Note…
Wednesday, December 8, 2010
We’re rolling half of our December/January position at the 118 strike up to 123, with the following order: Day limit order Buy to close 2 SPY Dec 118 puts Sell to Close 2 SPY Jan 118 puts Buy to open 2 SPY Jan 123 calls Sell to open 2 SPY Dec 123 calls for a net debit of $0.21 or better. Note, again, that the 2 contracts specified above represent *half* of our current position…
Tuesday, November 23, 2010
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…
Tuesday, November 2, 2010
We’re opening a third double-calendar for November expiration (note that we’re again using calls at both strikes): Day limit order Buy to open 2 SPY Dec 123 calls Sell to open 2 SPY Nov 123 calls Buy to open 2 SPY Dec 120 calls Sell to open 2 SPY Nov 120 calls for a net debit of $2.06 or better. Note, again, that 2 contracts per leg is our base-position size for double-calendars. Trading whole-number…
Monday, September 20, 2010
We’re adding the following position to our portfolio for October expiration: Day limit order Buy to open 4 SPY Nov 116 puts Sell to open 4 SPY Oct 116 puts for a net debit of $1.44 or better. Note that 4 contracts per leg is our base position size. 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…
Saturday, September 11, 2010
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,…
Thursday, August 26, 2010
With the S&P down about 1/2% and the VIX up almost 2%, we’re opening the following position for September expiration: Day limit order Buy to open 2 SPY Oct 114 calls Sell to open 2 SPY Sep 109 calls Buy to open 2 SPY Oct 97 puts Sell to open 2 SPY Sep 102 puts for a net credit of $0.15 or better. Note that 2 contracts per leg is our base position size for…
Jared Woodard is a registered commodity trading advisor who specializes in trading volatility as an asset class. With over a decade of experience trading options, futures ... Read More
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Monday, December 5, 2011
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