At the close of the August expiration cycle, on August 19, the SPDR S&P 500 ETF (SPY) was trading for 385.56. Now it’s trading 7.2% lower at 357.63. That’s a total of 10.9% over the past two expiration cycles.
For the year the S&P 500 (SPY) is down 24%, while the tech-heavy Nasdaq 100 (QQQ) and small-cap Russell 2000 (IWM) indexes are lower by 34% and 25%, respectively.
Nothing has changed from the last two months. So, I will repeat my stance. 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 an 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 2 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 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 one expiration cycle ago, the All-Weather portfolio is down roughly 8% since it was initiated back on June 3. The overall market is down roughly 14% over the same time. And 10.9% of those losses came within the past two expiration cycles, leading to the near-term losses in both of our passive portfolios.
Just one expiration ago, our VTI poor man’s covered call position was up 23.7% while the ETF alone is only up 7.8% over the same time. Now, after the market has experienced more than a 7% loss over the past expiration cycle, our VTI position stands at -4.9%.
That being said, 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.
We’ve managed to roll most of our October positions into the November 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 up 14.2% just one month ago. Now the portfolio is down roughly 10% since it was initiated back on June 3.
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 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 stated in our last issue, 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 PortfolioLike 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 21.1% while the stock alone is up only 4.8% 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, October 18, 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 November 14, 2022.
Andy Crowder
Andy Crowder is a professional options trader, researcher and Chief Analyst of Crowder Options. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.
