THE ERSTWHILE PORTFOLIO
AN INSIGHT TO THE REALITY OF MANAGING A PROFITABLE PORTFOLIO
|GRTS PORTFOLIO INCEPTION 7/15|
|TICKER||P CHANGE||LIQUIDITY||SHARES||ALLOCATION||G/L||ANNUAL RTN||26.82%|
CURRENT PRICE FORMATION
|TICKER||LAST||P LEAD||DAY AVG||FORECAST||RANGE|
Take notice of the “Range” column. We have two predicted negative price moves coming up.
The “P LEAD” listed prices are “skewed” because this is tied to the Ask and Bid price spread. I captured this after the market closed today. This is not calibrated into the Forecast price. It is a signal to show when the “book price” has reached “equilibrium”, thus a mean reversion in the price trend will take place. (Equilibrium is known when both “LAST” and “P LEAD” prices are equal: without moving for approximately 5 seconds. This is a signal that a new inventory of either buy or sell contracts are being introduced into the market through the exchange’s market makers.)
We want to see if we can make $250 from this equity basket within a “short-run” time frame. The inception date is July 15, 2014. We divide up 100 shares amount the 5 assets.
To find out how reasonable out expectation is, we use a DURATION equation that calculates about a 4 month period under its current daily returns calibrated to the daily Implied Volatility.
There is the annual return and daily return. This is hypothetical and not static. Yet, it gives us a clearer picture of just how long it might take under current market performance for this basket of equities to attain that amount: just under 10% of our capitalization at the present moment.
We use a 1/16th deviser equation that adjusts the time period to about 30 days. This is actually the “short-run” time horizon we want because we want to maximize the use of our capital for future robust payoff opportunities. The other reason is we don’t want to get into the bad habit of “profit chasing”, which only results in greater losses.
To attain our goal within 30 days, we can either re-balance the asset allocation by selling shares of one asset and using those shares to purchase stocks of a more profitable asset within the portfolio. Or augment our strategy with the asset’s option chain. By taking advantage of the underlying’s high liquidity. (There is a criteria that must be met for this to be executed. The very first one is that we see at least a minimal $1 predicted price move that translates into a break even point on our option trade.)
Our overall equity selection strategy is based on a 30-day cycle, starting around “expiration Friday” of each option cycle. This gives us a minimum 30-day window “cushion” to implement option buying to offset any losses (Note: NFX and BMY have predicted negative moves over $1) .
Moreover, we target assets that have upcoming binary events – earnings and dividend payouts that typically promotes more liquidity of the asset that equates to the volatility needed for option premiums to move in our desired direction. This is called “earnings” and “dividend” plays.
NEXT WEEK’S STRATEGY
First we make an assessment of our current status: My biggest price action movers are BMY and NFX with robust volatility. Both are predicted to drop over a $1 in the near future. EOX has about $0.46 cents more to go, reaching a high of $8.02, showing an average volatility around 0.4%). EDR shows a reasonable price move towards $11.42 or $0.32 cents, but has an average volatility (<.3%). ARCP has a shallow price prediction at $0.02 cents, yet price action is reasonable and volatility is acceptable (0.4%) for maintain a long position.
Considering that NFX and BMY are predicted to drop sufficiently, ARCP does not have much farther to go up, EDR and EOX are the strong longs for now. NFX has been the biggest earner so far with 35 shares or 3.34% of the portfolio’s allocation. It is the most invested asset at $1,516.55.
Current asset allocation is: EOX @ 2.34% or $4.50 (25 shares); NFX @ 3.34% or $28.00 (35 shares); EDR @ 0.40% or $0.00 (5 shares); ARCP @ 2.36% or $5.50 (25 shares); BMY @ 0.89% or $6.20 (10 shares).
The portfolio returned a profit of $44.20. We have $205.80 left to go.
We will re-balance the portfolio in this manner:
EOX 5.76% (60 Shares) [+$27.60]; NFX 0.39% (5 Shares) [-$5.65]; EDR 1.90% (20 Shares) [+6.40]; ARCP .88% (10 Shares) [+$0.20]; BMY 0.39% (5 Shares) [-$9.75]
Expected Profit based on predicted price moves: $18.80 (without fees)
BREAKING IT DOWN: TECHNICAL CHART ANALYSIS CONFIRMATIONS
We want to compare the asset to the S&P 500 to see how they relate in performance. This helps in determining which assets are best in attaining “diversification” – thus negating gains when the market goes against the “Long” position of the portfolio. EOX maintains some independence from the S&P 500. On the Price Formation graph, there is a price forecast of $8.02 or $0.46 cents to go up. The signals Long/Up/MM shows me a potential mean reversion. This is a weakening position on the upward trend so we’re cautious about its potential to maintain profitability in the current direction. EOX is optionable, but the premiums don’t meet our criteria for entry.
On the day of inception – July 15th – we set a predicted price target of $43.80. (1 – Red Arrow on Chart). We entered at $41.48. NFX surpassed our target price, peaking at $44.34 before closing on Friday at 43.03. (Target Price – Red Price Line and peak price notation on chart). That was a $2.23 move; earning $55.75 (25 Shares).
Down Red Arrow and “2”: We will reduce our position with NFX to 5 shares, taking a $55 profit. NFX option chain AUG (28) shows a premium Ask price of 1.70 (At-The-Money). Implied Volatility is 34.19% and Probability of In-The-Money is 50.62%. The Put Delta is -.467.
The Current Historical Volatility is 44% over the Implied Volatility of 36.22%. By rule, this is a “Sell” signal. The only drawback is the Ask/Bid spread is currently $0.15. This would need to tighten up and/or we’d put in a low limit price entry to cover the spread with a reduce cost basis.
DMI shows a reversal signal.
EDR is predicted to move $0.32 cents, to $11.42. It shows movement comparable with the S&P 500 so if there is a downturn our increased shares allocation could go against us. It is optionable, but the premiums are not a good prospect so this avenue is ruled out.
We entered ARCP at “1” – Yellow Arrow – and with our re-balance will come in a the opening price on Monday morning. We have a target price of 13.05 – Purple trend line. Noted is the “Long/Up/T signal from our “model”.
We entered BMY at 48.81 and closed on Monday (July 21st) with the rebalance at 49.10. Our “model” gave us a signal to “Sell” so we adjusted our shares, and with 25 days left in the AUG option chain, took a Long Put position at the 49 Strike price. The first price support (S1) is 48.46.
When we closed our positions for the re-balance on Monday morning’s opening bell: we had a $105.15 profit.
Current Asset Allocation – We dropped our cost basis from $2561.80 (initially) to $1367.70 (freeing up $1194.05 of capitalization.)
CURRENTLY DOWN: EOX -0.40%; BMY -0.24%; EOX -0.26%
CURRENTLY UP: EDR +0.27%; ARCP +0.36%;