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Saturday, August 18, 2012

Weekend Portfolio Analisys (08-18-2012)

Once again we had a stubborn market this week. Still low volumes and a market able to apparently shake off bad news, or not so good releases. On Thursday, SPY moved up to finally break the tight range 139 - 141.40 where it had been trading for the last few days.

Friday saw SPY move almost nothing, however RUT, which had been lagging the other indexes, managed to have not only a good Thursday, but also a very decent positive Friday, which makes me think of a possible trade that I will comment later on.

This Friday was also Options expiration. And my two RUT positions expired worthless for full profit.

The RUT 860/870 Bear Call spread was an easy one to manage during the whole expiration cycle. Never threatened at all. A full profit of $360 was obtained on the $2640 margin in play.

The RUT 700/690 Bull Put spread was also a comfortable trade that barely caused any concerns. It returned $255 on an invested margin of $2745.

As a result, August yielded a positive $615 to the portfolio ($597 after commissions) which represents a +4.43% portfolio growth on a starting balance of $13478 this month. The track record is now showing 23 winners, 3 losers and a balance of $14075, a +40.75% performance in 9 months. Definitely way above my expectations specially when I consider that I have managed my risks relatively well, keeping it as low and controlled as possible all this time.

Now, moving on to the September portfolio, the SPY 145/147 Bear Call spread is showing a small temporary loss of -$224. SPY is hovering around resistance in the 142 area, and with low volume and lack of important economic releases it might well break through resistance. However, with my break even point at 145.32 I still want to play my cards here.

- Stochastics are overbought
- RSI is overbought
- 76.24% of stocks are above their 20 SMA while 70.61% are trading above their 50 SMA. Which also signals an overbought market.

The only component missing, out of the ones that I use is the McClellan Oscillator. At 139.70 it is not overbought yet, pointing to some possible further upside room. In any case, I think this SPY trade can still be a winner, and I wont adjust the position unless SPY hits 144.80.

(Click on image to enlarge)

There is still a 71.34% chance of successful expiration on this trade. So, no reason to give up yet. 

Now, without the August RUT Bear Call Spread in the picture anymore, my upside exposure has been reduced to one position, which is something I like. And I am starting to consider another Credit Call Spread in the September cycle.

Looking at the RUT chart, we can see there is a resistance area right now around 820. There is another one further up at 830 and there is a final area of contention between 845 - 850.

(Click on image to enlarge)

Those areas could decrease the upside speed of RUT. And even if RUT keeps going up at current speed, the uptrend points to 855 - 858 by September expiration. Obviously this is a personal assumption and the trend might pick up even more speed. But I'm trying to analyze points where RUT is not likely to go, specially now with an overbought market. Based on this simple analysis, selling the September 860/865 Bear Call Spread seems to be a very good candidate. The spread is currently priced at 0.70. Necessary margin of 4.30 for a possible 16% return on margin 33 days away from expiration. What is even better is that, if you Beta-weight the 860.70 RUT break even point to SPY, it represents an SPY value of around 148.13. Definitely much safer than the current 145.32 break even point that I have in the 145/147 SPY position.

RUT is a wild beast. And the breakeven point at 860.70 would be less than +5% away, which based on history is totally within reach for RUT in 33 days. But with the VIX so low at only 13.30 this is what happens. As credit sellers, we see ourselves forced to get closer to current prices in order to sell for decent credits. So, I'm not sure about this trade, Ideally I would like to sell the 865 or even the 870 Calls, but I need a decent return of at least 13% on the margin I will invest. If I get to open this trade, then I will have two Bear Call Spreads in the September cycle. That means double exposure in the upside. So, my goal at that point would be to close the SPY 145/147 as soon as there is a slight pull back that allows me to minimize its current loss, or even leave for a small profit. Then I would only have the RUT Bear Call Spread in action, which feels safer, farther away, and would reduce my upside exposure to only one position.

This week will be pretty quiet in terms of news and the core seems to be focused on Wednesday and Thursday.

Wednesday - FOMC Minutes
Thursday - Initial Claims, New Home sales, PMI's for Europe, China and the US.
Friday - Durable ex transport, Durable goods orders

Good luck folks!


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