January 2010 Performance Summary

The Position Theta portfolio had a very good month on an absolute-return basis, and an even better month when compared to the performance of the S&P 500 (the benchmark I believe provides the closest comparison). The portfolio returned 3.49% in January, compared to -3.7% for the S&P 500.

At month end the portfolio consists of $98,925.12 in cash ($23,927.60 of which is reserved in connection with naked puts sales) and $11,480 in investments.

Since inception (10/13/2009), the portfolio has returned 10.4% vs. .06% for the S&P500, for a net difference of 9.8%. Note that this performance has been achieved through exclusively delta positive investments, or those that increase with an increase in the price of the underlying security (I have not entered into short-like investments).

Underlying security selection has been key thus far, with sizable gains in diagonal calendar call spreads on BKE, BRK.B and LMT, and short-term naked put sales on APP and APWR. The BRK.B spread benefited this week from S&P's inclusion of the stock in its index, while my willingness to "double down" on BKE and LMT spreads following large price decreases proved profitable. The jury is still out on my LO spread, but I am confident that the position will turn solidly profitable as we near March expiration. I sold high implied volatility puts on APP and APWR at strike prices I was willing to purchase the underlying stock. Each was repurchased for a marginal amount before expiration resulting in high IRR's on these positions. As might be expected from a down month, my long term (January 2012) put sales (CHL, V, NKE, USO) performed the worst, and have lost money thus far in the aggregate. With the exception of USO, which is a more speculative investment than I will normally enter, each of the underlying stocks I've sold long term naked puts on is an enviable business trading at a reasonable valuation. I believe that these positions will add substantial value to the account over the next couple of years.

I note that one of the benefits of selling puts while at the same time entering into diagonal calendar call spreads is that the two positions hedge volatility nicely (one is short vega, the other long). While I'd rather be a net buyer of volatility now, over time I'd generally like to be vega-neutral. With a few exceptions, the account will be built around trades designed to profit from directional movement and time decay, not volatility trades.