There really isn’t too much to report at the moment. Our passive portfolios continue to impress in the midst of a challenging market which displays the overall power of the passive approach. And I continue to mostly sit on the sidelines in our active portfolios, although that approach will be changing soon. I intend on adding several new positions to the active portfolios this expiration cycle as we are starting to see some good entry prices for several of the companies on our watchlist.
At the close of the October expiration cycle, on October 21, the SPDR S&P 500 ETF (SPY) was trading for 374.29. Now it’s trading 6.5% higher at 398.51.
For the year, the S&P 500 (SPY) is down 16.2%, while the tech-heavy Nasdaq 100 (QQQ) and the Dow Jones industrials (DIA) indexes are lower by 27.6% and 7.1 %, respectively.
Not much has changed in the last two months from a price perspective. Just two expiration cycles ago, SPY was trading for over 385. Yet, volatility continues to maintain a stark presence in the market’s day-to-day trading.
So, I will repeat my stance yet again. I expect to see a continuation of volatility going forward. I would like to say that most of the weakness is behind us, but unfortunately, I don’t have a crystal ball. I do expect the market to rally, particularly if geopolitical conditions or inflation data improve. How long that rally lasts, well, no one truly knows. I’ve read thoughts on where the market is headed from both camps, bullish and bearish. And the opinions are strong.
But as I continue to state, during times of market extremes, I’ve learned to take a more cautious approach. Keep some cash on the sidelines. It’s why I haven’t jumped headfirst into adding new positions to the active portfolios.
We have the opportunity of a lifetime ahead of us, and there is no rush in trying to call a bottom. We will take on new positions when it makes the most sense and we might have a slightly different approach in a few of our new positions—possibly extending our deltas a bit by buying two LEAPS for every call sold or some other variations. I’ll discuss this approach and others in our upcoming webinar on Tuesday.
I will repeat: Trading is about patience. It’s not about the number of trades you place during a given timeframe. It’s about the quality of trades and understanding there is an ebb and flow to trading frequency.
My intent is to slowly build out our active portfolios while, of course, continuing to manage our passive portfolios.
My apologies for the ongoing repetitiveness. The market continues to experience lots of challenges. At the moment, there really isn’t much to do but continue to sell call premium on a mechanical basis. Our approach so far has proven viable, at least when it comes to our passive portfolios. The active portfolios rely a bit more on timing which is why I continue to take my time ramping up positions.
Remember, patience pays.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Current Positions
Click here to access the “Portfolios” section to view each portfolio’s respective positions.
Portfolio Discussion
All-Weather Portfolio
After being up 5.7% just two expiration cycles ago, the All-Weather portfolio is down roughly 1% since it was initiated back on June 3. The overall market is down roughly 5% over the same time.
Just one expiration ago, our portfolio was down 8%. So, to be back to roughly breakeven when the market has experienced some serious volatility is a welcome relief.
I continue to be incredibly pleased with the performance of the overall portfolio so far as it continues to outperform its benchmark index on the upside and downside.
As I said before, the historic volatility that has impacted the market hasn’t put a huge dent in our All-Weather portfolio. And that should give us all great confidence about how this portfolio will perform in good times and bad going forward.
Besides IEF, which I plan to roll over the next few days, we’ve managed to roll most of our November positions into the December expiration cycle, so now we only have to concern ourselves with managing our deltas just in case an underlying position pushes through its short call strike or happens to decline sharply.
Yale Endowment Portfolio
Just like our All-Weather portfolio, the Yale Endowment portfolio was down 8.5% just one month ago. Now the portfolio is up roughly 5% since it was initiated back on June 3, while the overall market has been down roughly 5% during that same time frame.
Like the more conservative All-Weather portfolio, I continue to be pleased with the performance of our Yale Endowment portfolio. Both portfolios have proven to outperform their respective benchmarks on both the upside and downside. And remember, this is during one of the most volatile periods we’ve seen in the market.
We’ve managed to roll almost all but one (EEM) of our October positions into November expiration, so now we only have to concern ourselves with managing our deltas just in case an underlying position pushes through its short call strike or happens to decline.
Dogs (and Small Dogs) of the Dow
No positions at the moment. I will be adding at the onset of 2023.
Warren Buffett’s Patient Investor Portfolio
I’ve decided to keep our positions to a minimum due to the ongoing volatility in the market. At the moment, we only have one position (AAPL) but intend to add several more in the coming weeks.
As I have stated in our last few issues, I will be building out the portfolio to a minimum of five positions over the coming two expiration cycles, and remember, because this is an active portfolio, we will be rebalancing every month around expiration.
James O’Shaughnessy’s Growth/Value Portfolio
Like the Patient Investor portfolio, my Sentiment portfolio continues to be cautious. We added CVX to the portfolio back in mid-August and it remains the lone stock in the portfolio. Our position is up almost 50% while the stock alone is up only 15% over the same time.
And like our Patient Investor portfolio, I will be rebalancing every month around expiration. This simply means that we could have a position for just one expiration or, at least in theory, in perpetuity.
Next Live Analyst Briefing with Q&A
Our next Live Analyst Briefing with Q&A is scheduled for tomorrow, November 15, 2022, at 12 p.m. ET, where we will be discussing the options market, giving a detailed look at open positions, strategies used, and will have a follow-up with live questions and answers. Register here.
The next Cabot Options Institute – Fundamentals issue will be published on December 12, 2022.
