Performance YTD P&L: -$350
This past week saw options selling as profitable for my portfolio but my buy and hold positions continue to be a drag. MMP had earnings last week in which the stock promptly dropped by around 5%. This was following ABBV’s earnings the week before where the stock had dropped by 15%. Even then my account has only experienced a draw down of less than 2% since the beginning of the year. I think my goal of reducing volatility through diversification and premium selling is working, and this past month has been proof of that.
This month I will be adding a decent amount of capital to my portfolio which will allow me to significantly reduce risk on my buy and hold’s, and open the door for me to be able to sell options premium in more markets such as corn, soybeans, wheat, silver, etc.
I made some changes to my short premium positions this past week. Firstly I bought back my XLE short strangle and replaced it with a short strangle in MU. The reasoning was simply that XLE’s IV had dropped to a level that I felt it wasn’t paying out enough premium for the risk involved. MU on the other hand has an IV that is about 2.5x that of XLE, and as an added bonus is less correlated to QQQ(0.8 vs 0.7). In addition to this change I also opened a bear put spread in GLD. I wanted to introduce a directional play that had low correlation with my core portfolio. GLD offered a great opportunity to do this as it is currently bumping into some major overhead resistance. The position itself offers a 1:3 risk:reward setup. Max profit occurs at 119 and break-even occurs at 122.75. This position has 40 DTE.
I want to look way ahead this time and decide what sort of portfolio composition I want over the next few years. Last year on my TradingView account I began discussing the GSCI Commodities index vs the S&P500. This ratio has showed how commodities to stocks have cycled back and fourth for the past 45 years. I’m a huge believer in cyclical and mean reversion, so I believe this ratio being at an extreme offers an opportunity to position for the next cycle.
I have been thinking about what the correct portfolio should look like to take advantage of this extreme. I have decided on making a few changes to my buy and hold rules. One is that I want to increase my portfolio stock holdings from 65-35 (65% stocks and 35% cash/options) to 75-25. With that 75% dedicated to long term buy and hold stock positions I have decided on the following weightings: When the commodities to stocks ratio is at a cyclical low I want 2/3 in commodities and 1/3 in stocks, and vice-versa when at a cyclical high. That means right now I need 50% of my portfolio in commodity exposed stocks.
After I properly capitalize my account this month my current buy and hold’s will be about 25%. My plan is to research and choose holdings that are primarily in precious metals and oil industries. I am planning on adding in these positions over the next month.