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BookingAlpha Option Trading Advisory

Sunday, January 15, 2012

Weekend Thoughts (01-15-2012)

What a boring week! Thank God I'm not a day trader (yet). Lack of volume, lack of conviction to either side and in the end the S&P500 only advanced 0.88% overall. I took advantage of some upside moves that increased Calls premiums early in the week and opened an Out of the Money Call Credit Spread on SPY, essentially placing my bet that SPY won't hit 135 by next month which is roughly similar to saying SPX wont hit 1350.

Now thirty something days baby sitting this trade lay ahead. But that trade is not the one I want to focus on today. Instead, I want to talk about the fact that this is expiration week and with the added bonus of No activity on Monday, which is always nice for Credit Spread sellers.

First the SPX index:
(Click on image to enlarge)

 The bearish divergence with Stochastics going down is now clearer. Resistance has not been convincingly broken. I think, again, there are more chances to go down than to go up from here. Specifically the candle formed on Friday doesn't look nice at all for the bulls, but if 1300 is reached, 1310-1320 could be in play as a round of short squeeze would probably ensue.

Moving on to the VIX:
(Click on image to enlarge)

There is a double bottom formed with a support base around 20. Again, looking at the chart, the Stochastics Oscillator and MACD, the VIX looks more likely to move up than down. And remember VIX moving up equals fear increasing, generally equals markets going down. Yes, I am too technical, I know, but that's because I suck at analyzing fundamentals, and also because no matter how good at fundamentals I was, I couldn't still analyze all the fundamentals and news going on around the world and influencing the markets. By the way, the vast majority of "gurus" and so called "professionals" also suck at analyzing the fundamentals moving the markets :p

Finally the analysis of the two positions still open for the January expiration cycle:

The QQQ 61/63 Bear Call Spread can only be lost if QQQ (NASDAQ ETF) hits 61.30 this Friday. With QQQ sitting at 58.18, moving up to 61.30 seems unlikely (+5.2%) with the markets in overbought territory. I would like to let it expire worthless.

The IWM 63/65 Bull Put Spread would only be a loser if the world falls apart this week. IWM is sitting at 76.39 right now, and it would have to go down to 64.72 to affect me. That's literally a 15% drop, which is unlikely in just 4 days of trading.

So, overall the portfolio beta weighted versus the SPX index looks really comfortable:

(Click on image to enlarge)

If those two trades expire worthless this Friday, the Paper trading account will be reflecting 8 winners and 1 loser in the last three months, and a balance of +$1744 in profits before commissions. That is a 17.44% return before commissions on a $10000 portfolio in three months. Considering the abusive commissions imposed to Canadians, the return would be reduced to $1345, a +13.45% performance in three months for which many professional money managers would give away their first born male child. At that pace I would achieve over 50% for the year. And that my friend, is all due to the teachings of THIS GUY. Seriously, If you want to stop being fed, and you want to learn how to fish yourself, and if you are serious about trading, sign up with that guy and get ready to learn. The cost is negligible considering the value of the knowledge that will be yours for the rest of your life!  

Likelihood of new trades being open this week is low. It depends, if the markets rally above 1300, I will probably sell another credit spread using February expiration options, probably using IWM. Otherwise, It is unlikely that I will open anything, unless the markets fall too fast, in which case I will try to sell a Credit Bull Put Spread some where.

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