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Saturday, June 23, 2012

Weekend Portfolio Analysis (06-23-2012)

We are finally past the Greek elections. And as anticipated by many, the markets moved up on Monday and Tuesday (although not as hard as many thought). We got to hit SPX 1360 and according to last weekend's article the market would reach overbought level at that point and I would try to sell calls on RUT.

However, no calls were sold on RUT. Mainly for two reasons:

Reason number 1: Selling the 820 - 825 Calls would put me in a situation where both the SPX position and the RUT position would be almost equivalent. That is, when I beta-weighted one index versus the other, the 820 level in RUT was approximately equivalent to SPX levels between 1410 and 1420. So, in the event of a market rally both positions would be affected around the same area.

Reason number 2: Given that selling RUT calls in the 820 - 825 area, was adding the same risk around the same market zone, I decided that if I sold any RUT calls, it had to be in the 835 - 840 area. Which in terms of SPX meant 1430 to 1435. So, the RUT position wouldn't be affected at the same time as the SPX position whose break even is a little above 1415. But selling RUT calls at that level wasn't offering attractive credits. I'm talking about 10% or less reward to risk ratios. So, I decided to not enter them unless the possible maximum returns were more attractive (above 14% return on margin), which never happened.

Then we had a nice sell off on Thursday and a more calmed Friday, as it usually happens after hard sell offs the day before, and specially on Fridays. In spite of everything the S&P500 gained 0.6% this week.

This is how the portfolio looks beta-weighted:

(Click on image to enlarge)

Profitable outcome with SPX between 1177 and 1415 by July 20. And probability of success 87.54%. Really comfortable to baby sit for 4 more weeks.

Both positions are looking very healthy: the SPX 1415/1420 Call Credit spread and the SPY 118/116 Put Credit spread and I don't anticipate having to touch neither one this week.

As for market direction. I believe the momentum is more favorable to the downside. A clear downtrend channel has been formed:

(Click on image to enlarge)

and the VIX is looking oversold (meaning it will likely go up sooner than late. And VIX going up means fear = markets going down)

However, that's based on a purely technical assumption. In terms of fundamentals we have a lot of releases this week such as New Home Sales on Monday, Consumer Confidence on Tuesday, Durable goods orders, Durable ex defense, Durables ex transport all of them on Wednesday and USD initial claims on Thursday. So, plenty of activity in terms of releases and a lot comming from Europe as well.

If the markets move down, I will be a happy man, as the whole portfolio will feel more comfortable, closer to the middle of the profit picture. If the markets rally, it will really have to rally hard to make it attractive for me to sell calls, it will probably have to go up to 1380 - 1390 which seems unlikely at this point.

That being said, I don't think new positions will be added to the July portfolio at this point as the time premium is already below 30 days, and I usually can't get the nice rewards I look for (at least 14% - 15% return on margin). But that's not a problem because if the two positions currently open in the portfolio get to expire worthless, I will be achieving the best monthly performance after commissions so far, and that will be a higher than 7% return on the overall portfolio after commissions. 

Have a nice week y'all!

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