The stock market continues to have some big swings with the major indices registering moves over 2% on three days this week.  The 10 day-realized volatility for the SPDR S&P 500 Index ETF (SPY) is 18%, which is higher than 90% of 10-day periods over the past five years. The elevated volatility is occurring even as the SPY stemmed a five-week slide and hit an all-time time high on Thursday. This type of volatility at highs is unusual and suggests we remain in an unstable environment. 

Speaking of unstable, my father, the original trading maniac, whom I haven’t seen in a year, is visiting me this week and it’s been wonderful!

We’re marveling at continued dispersion or lack of correlation discussed here, as on any given day, the tech-heavy growth Nasdaq can soar or sink while the value cyclically-oriented sectors will do the opposite.  I can see that my father would like to get his hands on the keyboard and start firing off trades.  But, I’m keeping him at bay — he’s on vacation after all.  And showing him I take a more measured approach to managing positions, especially with the Options360 portfolio, which is all about limiting risk and delivering consistent returns.  

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This type of action has put an emphasis on maintaining a steady hand on the tiller to navigate the up-and-down waves.  It’s imperative not to become too emotional lest one panics into selling lows or reaches for buys near the highs. 

Walmart (WMT) probably provides the best illustration of the need to manage risk.  The position, a March (3/19) 125/130 bull put spread was initiated a month ago when shares were trading around $138. Over the course of the next three weeks, the stock sank over 8% to a low of $126.70.  The decline was in a nearly straight line leaving me few options for attractive adjustments. Instead, my first action for risk reduction was to close a third of the position when the stock breached the crucial $130 support level.  Sometimes the best hedge is to simply reduce exposure. The position was still in the negative column by $700 with a max risk of $1,350 if WMT were to be under $125 on the March 19 expiration. That would be our worst loss in over a year.  But, with our risk defined and manageable, and was able to make a clear judgment that I think the stock was finding its bottom. 

And sure enough, WMT shares have bounced back, trading up to $132 this week. This gave me an opportunity to make an adjustment, basically rolling the spread down and narrowing the width between strikes. This adjustment boosted our probability while also reducing risk, giving me the confidence to increase or add back the number of contracts to the original allocation. The position is now back to even, with the potential to deliver a solid profit over the next week. Whew!

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Being able to exhale after riding that admittedly-uncomfortable wave in WMT allows me to turn my attention to other more enjoyable Options360 positions such as the bullish diagonals in Mosaic (MOS) and Pulte (PHM) which have been working well and only needed standard ‘rolls’ to reduce cost basis and bring in income.  Both of them are now solidly in the green and should hopefully coast to profitable close-outs within the week or two.  Our SPY triple-play strategy took another roll and while not profitable, now has a cost basis of less than $100 with the potential for two more rolls. 

We also added one new position in McDonald’s (MCD),  and I expect next week to bring more excitement and opportunities. 

But right now, my father and I are headed to the beach with our boogie boards looking for small waves and slow rollers.

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