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Sunday, May 20, 2012

Weekend Portfolio Analysis (05-20-2012)

What a week! S&P500 down -4.4% to what has probably been the worst performance by the market this year. The downside pressure continues and the pattern totally mutated in respect with the previous week.

The previous week, there would be gap downs everyday, which would be recovered during the day in the American session. Making us believe that the US could keep this market alive and that there was no better bet than the US markets. That's how that week, in spite of the clear downtrend, almost all the candles were green. Now, this week was totally different. There would be gap ups every day...and they would be taken back little by little throughout the American session, specially the last two hours when the big money comes in. So, now the downtrend is clear and the sentiment looks worse, showing some lack of confidence by the big money.

So, this looks bad. This sucks. However, there will be a reversal. As it has always happened. And the day it happens, the media won't alert you about that in advance. Right now judging by the media, it looks like the world is falling apart with no signs of a clear sky.

But if you think about it, this is a great opportunity to take advantage of. With the increase of the VIX, options are now juicy. You can sell them for more credit very far out of the money. For example as of this writing a sell of a June 122 SPY Put, and a purchase of a June 120 SPY Put, would result in a credit of $0.30 and a breakeven point of SPY 121.70 and only 26 days to materialize. That is a very likely $420 profit on a margin of $2380 in 14 contracts. That looks like a good position to me, and the one everybody will talk you out of right now. The one everyone would be really scared to put to work right now. Everyone talks about buying stocks or betting on the upside when the markets are oversold or pull back, but very few have the courage to do it when the time comes.

The truth is, there may be more downside. There will be, but we are getting close to the end, at least for now. And a pull back of some sort must take place in a few days. I'm not saying a trend reversal, but at least a momentary pullback to the upside to relieve the extremely oversold conditions.

I don't want to mention numbers about how oversold this market is right now. I mean, it is so freaking/extremely oversold that it almost make no sense to talk about that.

On to the portfolio. I had to adjust the 131/129 SPY Put credit spread this week. Moving down to 127/125 in what seems to have been a good decision. Now  SPY would have to go down to 126.58 to hit the breakeven threshold. The plan here is to leave the position when half the profit is made, in order to recover from the 131/129 loss. I would leave it to expiration and full profit, if there wasn't another Put credit spread open, as is the case now on IWM. So, it is double the risk in the downside which doesn't look wise for the portfolio.

As for that IWM 72/70 IWM Put Spread, with IWM currently at 74.69, there is still some room. I will adjust it down a couple strikes it the 72 level is broken this week. Otherwise, the plan is to leave if there as close to expiration as possible.

Looking at the portfolio beta-weighted vs the SPX:

(Click on image to enlarge)

Breakeven at SPX = 1262.21. Probability of success is currently 63.01% at expiration 26 days from now.

Be well, and stay profitable my friends!

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