What a crazy quarter we've been having!
The last major update to our virtual portfolio was back on the March 12th and, although we do send out alert updates on a regular basis and discuss the trade ideas daily in Member Chat, I think it's about time we start a fresh page but this one will be brief and I urge you to read the original postand the update if you haven't already to get an idea of what we are trying to learn by following this "hyper-aggressive" virtual portfolio model.
As promised, it has certainly been a wild ride and our last Alert Update from May 12th left us off with $72,652 worth of closed transaction and a virtual net balance of $34,712. As is usual around expirations, we reinvested into rolling and improving our remaining positions while cashing out more winners.
The nature of this strategy is, of course, that the positions that are left open are usually losers but, hopefully, they are losers we are willing to keep working with. As usual, our worst performing open position is FAS but, also as usual, FAS generates the most weekly cash – even with conservative, 1/2 covers. Since May 12th, we closed the following:
Once again, we make money on our little FAS cash machines ($3,000), and we spent no money rolling them but we got burned as the June $29s dropped $1 to .75. It's a tremendously volatile position and the key is there are 4 weeks to expiration and we are in a position to sell another $9,000 to $12,000 worth of short calls. At the moment we are naked (not much to lose at this point) and one day, maybe, we will get a win when FAS pops and we are uncovered.
Until then, it's like renting our an apartment and putting the rental money back into renovations each month and hoping to one day make a sale. By avoiding making unfunded rolls – it's like breaking even on mortgage and taxes while you wait for the value of your property to bounce back.
Overall, we closed net $8,486 worth of positions this week, running our realized gains up to $81,138 but that unrealized FAS loss hurt us so let's do the math.
The following are our remaining open (unrealized) positions:
We have $47,505 of unrealized losses – up almost $10,000 from our last update but mainly the darned FAS longs. Fortunately, we also took $7,950 in virtual profits and that nets us out at a not too bad $33,633 – still up 34% from the start. We have a pretty good mix of bullish and bearish positions and we would benefit greatly from a market move in either direction but a flat market is not kind to us and we will have to adjust our strategy towards more premium selling if it keeps up.
Keep in mind that it's the rolling and adjustments of the losing ends that are the main thing we are trying to practice. When trading short-term positions, the hardest thing to do is to fix a move going against you – sometimes it's worth it and sometimes it's not but only practice will help you determine which is which!
For example, technically, that FAS June $28 position is PRICED at .75. Does that mean it's WORTH .75 x 8,000 ($6,000)? Hardly. Has a week gone by lately when we have not generated $3,000 by selling calls against that position? So, if we can generate $12,000 in 4 weeks selling front-month calls against the longer FAS calls – doesn't that mean they are WORTH more than $6,000 to us?
You have to look at your positions based on more than just their price. Our DIA puts are protecting us from a worse-than expected drop and we have already cashed $2,968 worth of short puts against it and we originally had 8 May $124 puts in February, which have turned into 16 July $127 puts and our primary insurance, as we have made $8,633 in profits cost a net of $2,392 and it's a lot easier to sleep after a poor market week like this one knowing they are there!
Most of our other positions are the bad end of spreads where we've already cashed the winners but still (and I must always point this out) 90% of our pain comes from where we BOUGHT premium – it's the selling of premium that keeps us in the game!
I know this doesn't sound well but, if all goes well, FAS will test it's 200 dma at $26.50 – around where it was in mid-March. From there it shot up to $32 in less than a month, our plan it to try to get to the July $27s, which are now $2.35 (up $1.60) without taking money out of our pockets. That means our goal is to sell $12,800 worth of short calls to pay for the roll as well as to hopefully get the roll for less than $1.60. Overall, the fortunes of the Financials are now tied in with those of the commodity pushers – here's a great chart to illustrate how that early POMO infusion (Nov-Feb) was used to buy up commodities and now the IBanks are trying to gnaw their legs off to get out of the commodity trap (just like 2008).
We EXPECT FAS to go lower, we PLAN for FAS to go lower – even though we HOPE it goes higher on Monday. We don't have to save up $1.60 and then roll either, we can sell (hopefully) 40 next weekly $28 calls for .60 (now .42) on a move up and there's $2,400. The cost of the roll down to the June $28s is currently .40 ($3,200) so we borrow $800 from cash to improve our 80 June calls by $1. That improves our delta relative to the short caller and puts us in a realistic position to sell $27 weekly calls (now .95) if FAS falls below the $27.50 mark again (and that would be back to a half cover, of course as it fully pays for the roll.
We'll see how this plays out as the month draws to a close. If the market falls violently next week, we'll lose a bit on FAS but make a bit on GMCR and DIA and then what would happen? We would cash those out and roll FAS lower and longer because we still like them long – we just don't know when they will pop. If the market flies higher and FAS hits $32 – then we wipe out our most of our $26,000 loss there and we have tons of money to put into rolling GMCR and DIA along because, very likely – a huge run-up like that would seem silly to us and we'd want to aggressively short it.
This is how balancing works, even in an aggressive virtual portfolio.