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Sunday, July 8, 2012

Weekend Portfolio Analysis (07-08-2012)

The first position of the August portfolio was opened on Tuesday. A RUT 860/870 Bear Call spread, based on the fact that markets tend to be slow during summers, and specially bearish on August historically speaking. Plus the fact that in order for this position to be a loser RUT would have to break the High of the year at 847.92 by a good margin.

Right after the position was opened the market kept going higher. I opened the position while RUT was hovering around 808, and the market kept going up past 819. Inflicting some psychological pain at the very beginning of the trade. It is impossible to consistently guess the top or the bottom of the market. And this case was no exception. I sold Calls and the market had not reached its top yet. But with this strategy you have to risk some pain in order to enter the position and not miss it. I thought the markets were reasonably overbought and had I delayed my entry, I could have lost the opportunity had the market decided to pull back. Right now, with RUT at 807 the trade is not showing a negative balance anymore.

The week started on a bullish note, continuing the trend of bullishness before holidays. Then a pull back ensued Thursday and Friday. Overall the S&P500 moved -0.7% this week.

(Click on image to enlarge)

And you know I'm a technical guy. Still working these overbought conditions, and with the addition of most oscillators going down, I believe this pull back is not over yet. Specially in the very short term (this week), I think the mood is favoring a bit more downside. Then, the uptrend might continue through the uptrend channel that has been formed. But here's the thing: Even if the uptrend continues, as long as it stays "organized" inside the uptrend channel, it is pointing to a maximum value of around 1400 by July expiration (12 days from now), which would make my July SPX 1415/1420 Bear Call spread a winner. So, in order for this position to lose the market has to break out hard, past the speed of the current uptrend. With SPX at 1354, the position is still comfortable to manage, over 60 points away with only 2 weeks to expiration. ThinkOrSwim is showing an 85% probability for this position to be a winner.

That being said, the reality is that there are two bearish positions on the Portfolio. The SPX spread and the RUT spread. And if the market does decide to break out above the uptrend channel, I could be in trouble with double risk on the upside. This situation might force me to close one of them before expiration, preferably the SPX spread, which has milked most of the potential profit by now.

As for the other position left, the SPY 118/116 Bull Put spread. This one has been very easy to manage from the very beginning. I happened to guess the exact market bottom, and I never had to worry about this one. The plan is to let it expire worthless.

A look at the July portfolio Beta-weighted:

(Click on image to enlarge)

Profitable outcome with SPX between 1174 and 1416 by July 20. And 85.70% of probability of success.

This week, earnings season begins. And although many analysts are expecting disappointing results, the bar has been lowered so much that even mediocre results can be above expectations. So, I don't dare to forecast anything here. Other than that, we will have FOMC minutes on Wednesday and PPI report on Friday as the two main ones. So, it is going to be a relatively quiet week in terms of reports.

With three positions currently open (2 in the July portfolio, and 1 in the August portfolio) I don't anticipate new positions for this week. The focus will be on whether to close the SPX 1415/1420 Bear call spread. I would like to open a Bull Put spread in August but need more of an oversold market to do that. If the market wakes up with a significant bullish mood on Monday, I will start to look into closing the July SPX spread. Otherwise, the week will be quiet for me.

Have a nice week!


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