Wow, Portfolio Rises 14% for Week!

Our Aggressive portfolio had a major burst rising 14% last week as volatility continued to fall. That brings our YTD gain to 9%, well above the market return. The big story was the decline in volatility at just the right time. We had two short option positions against the VIX index and the drop in volatility ensured that both expired worthless leaving us with 100% gains on both positions! We like to take short positions against the VIX index whenever volatility moves sharply higher which we did during the most recent market crisis. Fortunately the market recovered just in time prior to expiration. Remember selling options short is risky; however there are ways to mitigate that risk. In addition, the vast majority of options expire worthless, so selling options short is a way to generate income and take advantage of those statistics. We also took a long position against the VIX index following the recent fall this week. We purchased a long VIX call option that expires in March at an exercise price of $21. The call is slightly out of the money. We are looking for protection in case volatility rises sharply over the next month. We also sold a farther out of the money March VIX call with an exercise price of $25 to help offset our protection cost. We were able to get this spread for essentially $1.10 per share and consider this relatively cheap insurance. If volatility does rise sharply our gain will be limited, but we will still make over three times our investment. If volatility does not rise, that will likely mean that our overall portfolio is increasing in value and that increase should more than offset the cost of the insurance protection. Remember, one of the keys to successful options trading is to manage risk and that is what we are doing by entering positions like this one. We also plan to increase our investment allocations in long call options.