by Chase Thomas and Harvey Sax
Markets have continued to respond to changes in interest rates, oil prices, and geopolitical developments. The 10-year Treasury yield rose above 5% last week after the Federal Reserve raised interest rates and signaled one further increase. Equities declined through the second half of the week as yields and volatility increased.
Oil also remained elevated following the shutdown of a Saudi pipeline, with USO trading above 164 amid expectations of a six- to ten-week closure. Subsequent reports indicated that approximately 60% of the pipeline's flow could be restored within days, with the remaining disruption potentially lasting closer to six weeks. Oil subsequently declined.
Markets reversed direction again today. Oil fell by as much as $8 intraday following reports that the United States paused potential strikes on the Houthis and may pursue renewed talks with Iran. Gold and silver also declined, while Bitcoin rose approximately 20% over 24 hours after declining the prior week amid concerns surrounding pending cryptocurrency legislation.
The Nasdaq rose nearly 3%, led by technology and AI-related companies, reaching its highest level since June 15 after lagging for approximately two months. The 10-year Treasury yield moved back below 5%, while volatility increased.
Current positioning continues to reflect the ongoing effort to reduce and ultimately exit the oil positions.
Last week, the strategy realized the full premium on sold S&P 500 calls and puts before rolling into the following week's expirations. Longer-dated sold puts were also rolled and split, and many oil positions were repositioned.
The recent decline in oil has brought some sold puts closer to their strike prices. The strategy continues to roll and split the oil positions with the aim of reducing and ultimately exiting the exposure.
Implied volatility remains elevated, increasing the rate of time decay on the options that have been sold. The effectiveness of this positioning depends in part on oil remaining within a manageable range; large daily moves in either direction create greater pressure on the positions.
The strategy continues to manage its oil exposure through rolling and splitting positions with the aim of reducing and ultimately exiting the positions.
Recent oil movements have created additional pressure on the sold puts as the underlying moved lower. Elevated implied volatility also continues to affect the rate of time decay in the options.
On the equity side, covered calls have been rolled out and up following the recent market rally. The strategy also retains the ability to split downside puts if equity markets decline.
MTD: Approximately -1% (preliminary, unaudited, before fees)
Recent performance has been affected by movements in oil and equity markets. Current oil positions are being rolled and split with the aim of reducing and ultimately exiting the exposure.
Following the recent equity rally, covered calls have been rolled out and up into October. The recent trades are reflected in account activity for investors in Synthetic Strategy Accounts.
Recent market movements have affected the strategy through both its equity exposure and options positioning.
The recent rally in technology and AI-related companies moved covered calls sold last week into the money. Those covered calls have been rolled out and up into October.
The strategy continues to manage exposure through its options positions rather than treating the recent market movement as a settled directional trend.
September has been a difficult month for the portfolio.
MTD: Approximately -2.5% as of Friday (preliminary, unaudited)
YTD: Approximately +1% (preliminary, unaudited; fee basis to be verified)
The portfolio recovered part of the September decline during Monday's session.
The recent market rally remains relatively narrow. The equal-weighted S&P 500 has declined steadily since mid-August, while capitalization-weighted averages have remained stronger. Harvey's view is that the broader averages may not fully reflect the limited number of companies participating in the recent advance.
Technology has remained a primary source of market leadership, although participation within the sector has not been uniform. Several portfolio holdings, including large-capitalization dividend-paying companies and medical companies such as Abbott, Boston Scientific, and Pfizer, have not participated to the same degree in recent weeks. Alphabet has traded within a range, while Energy Transfer has experienced a weaker month.
The portfolio remains diversified and is not being repositioned toward concentrated technology exposure in response to recent market leadership. Current positioning continues to follow the existing strategy rather than adapting to short-term changes in sector leadership.
Recent market conditions have required continued adjustment across the options strategies.
For the S&P 500 positions, last week's sold calls and puts reached their full premium before being rolled into the following week's expirations. Longer-dated sold puts were also rolled and split.
Going into the current week, oil positioning had approximately 10%–20% of position value on the put side and 80%–90% on the call side, reflecting an expectation that oil would continue trading within a range. The subsequent decline in oil moved some sold puts closer to their strike prices, while the equity rally moved covered calls sold the prior week into the money.
The covered calls have been rolled out and up into October, while oil puts that moved into the money have been rolled and split. Investors in Synthetic Strategy Accounts and 100 accounts can see these transactions reflected in their account activity.
When a position is rolled, the existing position is closed and the resulting gain or loss is booked. A new position is then opened with a different strike and/or expiration. Any premium received from the new position represents compensation for taking on the new risk; it does not reverse or refund the result of the position that was closed.
The primary areas being monitored are oil prices, Treasury yields, and volatility. Recent market movements have differed from the positioning assumptions at the beginning of the week, and current risk management reflects those changes.
Harvey also noted the difficulty of generating positive real returns in income-oriented portfolios in the current environment. In his view, this may contribute to investors, including those approaching or in retirement, maintaining higher equity allocations than might have been typical historically. He considers the resulting equity exposure an area worth discussing with clients, particularly given continued uncertainty around inflation and the purchasing power of income.
Performance and Reporting Note: Fund performance figures are preliminary, unaudited, and reported before applicable fees and do not include incentive fees unless otherwise noted. Official NAV Fund Services statements govern final fund performance reporting. Account-level figures for separately managed accounts, when included, are reported from Interactive Brokers; fee treatment should be verified against the applicable account statements before publication.
The views expressed herein reflect current market commentary and portfolio observations as of the date published and are subject to change without notice. Statements made by portfolio managers represent current opinions based on prevailing market conditions and should not be interpreted as guarantees, forecasts, or assurances of future performance or market direction.
Any performance information shown is preliminary, unaudited, and may reflect results before applicable fees, expenses, or final administrator reporting where noted. Actual investor results may differ based on fee structure, timing of contributions or withdrawals, and other account-specific factors.
This material is provided for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security, fund, or investment strategy. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal.
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