Dirac Portfolio Review: 4 August 2025

Feeding Time for the Birds

Since my last review on 18 July I have made a few adjustments to the Dirac Portfolio especially as a result of last Friday’s weakness in the US equity markets – since this portfolio is totally focused on these markets:Last week (25 July), with the Options I had sold in XLK (technology sector) expiring, and being In-The-Money (ITM), but not wanting to sell my shares, I simply rolled the Options out another week (to the 1 August expiration) for a small net credit of $20. With these new Options expiring last Friday (1 August) and being Out-of-The Money (OTM) and practically worthless (meaning I kept all the premiums that I received when I sold the Options) I then sold another Option, expiring in 2 weeks (15 August), at the $255 strike price to bring in another $565 in credits. I also rolled my short Call position in XLC, that also expired on 1 August, out another 2 weeks for an additional $159 net credit. In addition, with the weakness in US equities generally, I also sold 2 contracts of Call Options against share holdings in SPLG, at the $73 strike price and an additional credit of $216. This brings the total of credits from the sale of Call Options to $960 in the past 2 weeks.

Current Holdings in the portfolio now look like this:

with the share portfolio showing a return of 4.1% since inception six (6) weeks ago and where I have $1,495 in total credits available for deeper downside protection if needed or to be kept as “alpha” in terms of total returns. At the moment, if the credits were to be used as “alpha” the total portfolio return would be 4.4%. The portfolio is ~60% hedged for a moderate pullback but is not hedged for a disaster/flash crash. Time decay in the Call Options sold is presently showing as ~$42.50 per day. As shown in the top screenshot, Internal Rate of Return (IRR) is presently running at over 30% – but this is after only 6 weeks and is not likely to be sustainable.

However, it is interesting to look at the equity curve:

where it is clear how the sale of the Call Option hedges has reduced the draw-down over the past week compared to the benchmark broad US equity market SPY Fund and also that the portfolio volatility is currently low at only 3.82%. I am still not 100% invested (~90%) but a check on rankings and recommendations from the Kipling workbook suggests that no significant changes in asset holdings are called for:

with current holdings in SPLG. XLK, XLC, XLF and XLI still showing Buy or Hold recommendations.

Calculated allocations based on risk parity and 2% targeted volatility per asset look like this:

that suggests that I might be over-hedged in SPLG and XLC, but, in light of the price action at the end of last week, I like the 60% hedged position and I’ll wait to see what the market decides to do in the next few days before making any further adjustments.

Update: 5 August 2025

As advised in the comments section I have closed my position in XLF (Financials) and am looking for other opportunities. At the moment, XLU (Utilities) is looking the most promising:

After consolidating in a narrow range since May, XLU broke out of this range in mid July and has recently made a new push higher in the last 2 days.

To see how XLU is performing against a benchmark we can plot a chart of the asset/benchmark ratio – in this case I will use SPY (US equity market) as the benchark:

On a relative performance basis XLU is building steam with the 8-period Exponential Moving Average (EMA) having crossed the 21-period EMA about a week ago and above the 55-period EMA yesterday. It is looking as though the 21-period EMA may also cross above the 55 EMA in the next few days if XLU remains in the trend. XLU has pulled back slightly today but I will probably add XLU to this portfolio should we move to new highs from here.

btw – let me know whether you find the charts with a dark or light background easier to read on this site.