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How the Dog of Dogs Portfolio Made 124% Last Week

Two messages  again today – first, a reminder that in celebration of the New Year, I am making the best offer to come on board that I have ever offered.  The offer expires in three days.  Don’t miss out.

 

Second, one of our portfolios gained an astonishing 124% last week.  I want to tell you about this portfolio, reveal the exact positions we hold, and show how it should unfold next week (and thereafter).

How the Dog of Dogs Portfolio Made 124% Last Week

This portfolio is based on the expectation that the volatility ETN VXX will continue its downward slope in the future.  The following is an excerpt from the weekly newsletter I send to my paying subscribers:

Summary of Dog of Dogs Portfolio

This $5000 portfolio is designed to take advantage of the long-term inevitable price pattern of VXX.. Because of contango, the way it is constructed, and the management fee, the stock is destined to fall over the long term.  Twice in the last three years, 1 – 4 reverse splits had to be made so there would be some reasonable price to trade.  We use calendar spreads at strikes below the underlying price.
As a reminder why we call this the Dog of Dogs portfolio, here is the 4-year graph of this ETN since it was formed:

VIX Futures January 2013

The stock never really traded for $2800 as the graph suggests – adjusting for the two reverse splits made it seem that way.  This surely is the worst-performing “stock” in the entire universe over the past four years.

Here are the current positions we hold in this portfolio:

 

     

Dog Of Dogs

 
 

Price:

 

$27.55

Portfolio Gain since 12/04/12 =

+14.5%

   
                   
 

Option

 

Strike

Symbol

Price

Total

Delta

Gamma

Theta

-3

Jan2-13

P

27

VXX130111P27

$0.42

($126)

     

-6

Jan2-13

P

28

VXX130111P28

$0.97

($579)

     

-4

Jan2-13

P

28.5

VXX130111P28.5

$1.32

($528)

     

-3

Jan-13

P

28

VXX130119P28

$1.46

($437)

     

6

Feb-13

P

28

VXX130216P28

$2.59

$1,551

     

6

Feb-13

P

29

VXX130216P29

$3.23

$1,935

     

7

Feb-13

P

30

VXX130216P30

$4.03

$2,818

     

3

Mar-13

P

28

VXX130316P28

$3.45

$1,035

     
         

Cash

$57

-303

-167

$9

  Total Account Value  

$5,726

-5.3%

   

6

        Annualized ROI at today’s net Theta:

57%

 

Results for the week: With VXX down $7.88 (22.2%) for the week, the portfolio gained $3,361 or 142.1%. We were patient while VXX headed higher due to fiscal cliff uncertainties, and this week our patience was rewarded as VXX fell big-time. Next week looks potentially great even if VXX does not continue to fall. A flat or lower price for VXX should result in a double-digit gain for the week.

The risk profile graph shows that if the stock is at the same level ($27.55) next Friday, the premium we collect from having sold puts at the 27, 28, and 28.5 strikes will decay sufficiently to return a gain of $740 (about 12%) even if the stock does not fall as history suggests it will. The graph also shows that a double-digit gain for the week can be expected at almost any lower price for the stock as well (this is possible because we hold six extra uncovered long puts).

Note: Most Terry’s Tips paying subscribers mirror this portfolio (and/or others of our 8 total portfolio offerings) through the Auto-Trade program at thinkorswim rather than making the trades on their own.  We invite you to join us as a paying subscriber at the lowest price we have ever offered.

 

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins