More on Durable Diamond Stock Options Trading Strategy

Last week I showed you the risk profile graph for our Durable Diamond portfolio - it showed that we would make a gain of 10% or more if DIA ended up at any price between $110 and $118 in one week ending on Friday.

Imagine our distress when the stock tanked to $106 early in the week. We made plans to roll over all the positions so that we could wait it out for another month. But then the huge rebound came along and DIA ended at $113.57, well within our profit range. Instead of a 10% gain, our actual portfolio gained over 20% in value. For the entire 5-week expiration month, our Durable Diamond portfolio gained 38%.

Our Mighty Stalagmite portfolio (using SPY as the underlying) also made a gain of 38% last month. In accordance with our Withdrawal Rules we took out $3,600 in cash from both those $10,000 portfolios. This withdrawal amount constituted our profit target for the entire year, and it came in only the second month of trading our Mighty Mesa strategy.

As nice as these returns were, we can't give the entire credit to the workings of the Mighty Mesa strategy (although others might be tempted to). A good share of the gain was made because the volatile market pushed up Implied Volatilities (IV) of the options. This results in an (often temporary) increase in the value of all options, and since our long options have a larger absolute value than the short-term options, our indicated portfolio values get higher.

A month ago, IV for SPY and DIA was about 21%, and now it is about 28%. The VIX has gone from about 20 to 32 today, and it was briefly over 40 during the madness last week. In future months we must remember that changes in IV work both ways and not be disappointed when the results at the end of a future month are not quite what the risk profile graphs indicated they would be.

Windfall Gains Possible? This month, in all but one of our portfolios, we rolled the expiring short September options to the Sep5-08 quarterlies rather than to Oct-08 options and it is almost like getting an extra expiration month. Check out the risk profile graph for the Durable Diamond - it shows remarkably high possible gains in a mere 11 days. We just might be able to enjoy 16 expirations each year rather than just 12 for these portfolios.

Here is the risk profile graph for our Durable Diamond portfolio for an expiration "month" that ends a week from next Tuesday:



The graph shows that we will make a profit at any price between $108 and $120, and better than 20% if it lands between $110 and $117. It will be an interesting wait over only 7 trading days.

I'll report back to you on how this portfolio fared.

Life is good.

Terry