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The PWR strategy I'm publishing here at Options Profits allocates capital tactically each month into three positions designed to offer positive, but also uncorrelated returns. Before identifying the ETFs we will trade for the June expiration cycle, we need to close out our open June positions.
Trades: Buy to close the IYR June 62/63 put vertical spread for a net debit of $0.92 or better. Buy to close the USO June 36/37 put vertical spread for a net debit of $1.00 or better. The IEF June 66/67 put vertical spread will expire worthless, or traders can buy the 105 calls to close for $0.05.
Let's review the June performance. We reduced our exposure in United States Oil Fund (USO) twice during the cycle and that helped prevent much larger losses, so the weekly risk management checks did some real good. For the iShares Dow Jones US Real Estate ETF (IYR) position, the broad market selloff meant we closed that position not far from the maximum loss point. We also booked the maximum possible profit on the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) position as bonds rallied. I've lost count of how many times in the past few years traders with sympathies for Austrian economics have asserted that U.S. yields can't possibly go any lower. People call the trade where you short Japanese government bonds "the widowmaker" because so many traders have taken heavy losses doing it. The trade where you short U.S. debt under the spell of Hayekian fantasies and in the face of major deflationary threats is developing a similar notoriety. I don't mean that just as an ideological dig - some of my best friends are libertarians! - but rather to note that we're well into abnormal territory here, where "can't happen" becomes "already did."
As mentioned before, I've been doing some follow-up research on tactical asset allocation (TAA) strategies before I decide whether to alter the way we trade PWR. One thing that I've found is that TAA strategies seem to really display their prowess incrementally over time, rather than in dramatic contrarian bursts. Look at it this way: if you were 100% long stocks during the month we held these June trades, you would've fared far worse than being long 33% bonds, 33% (and then 5-10%) oil, and 33% real estate. So the relative performance of PWR this month was solid, and if the market keeps dropping we will get moved even further toward cash.
Next, we're going to enter the indicated trades for the July expiration cycle, as follows:
TLT: 5 units
SPY: 1 unit
IYR: 5 units
To gain this exposure, we will enter the following positions.
Trades: Buy to open 5 TLT July 127 puts for $3.05 and sell to open 5 TLT July 129 puts at $3.95.
I check in on the model each Friday afternoon to see whether any stops have been triggered, and while these July trades are open I will post weekly updates in the comments section here.
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