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Sunday, November 4, 2012

Weekend Portfolio Analysis (11-04-2012)

The S&P500 started the week at 1410.99 on Wednesday and closed at 1414.20 on Friday for a small 0.2% gain. We had a solid bullish bar on Thursday and a strong start on Friday after the better than expected jobs report. I had the opportunity to close my SPY 137/135 Bull Put Spread for a debit of 0.11, which was much better than my plan of 0.15 mentioned in my analysis last week. Why didn't I close it then? Simple: I was too greedy. In the twelfth month of trading this system, trade by trade publicly disclosed on this website, I have realized that I'm usually more greedy than fearful. I could have closed the trade for 0.11 debit, I had time to do it for .12, .13, .14, .15 I had like two hours to close the spread for those prices and I didn't, only wanting and convinced that I could get a better exit.

Had I closed the spread for 0.11 at the start of the session, I would have booked 0.15 (As the trade was entered for a 0.26 credit back on October 12. Then only the RUT 750/740 Bull Put spread would remain in the portfolio which seems to be just a matter of time to confirm as a full winner, stress free type of trade. But I didn't, my mistake for not sticking to my plan.

This proves once again the chaotic nature of the markets short term. A much better than expected jobs report and the markets tank. I mean how many times have you seen the market falling on good news and how many time have you seen it rally on bad news? That's why I don't try to predict short term moves. We would all be millionaires if it were that obvious, wouldn't we? I have a bias, it's natural as a trader to have a bias. But my bets are not based on where I think the market is headed tomorrow, but simply where is it not likely to go next month. See the difference? That's why I sell credit spreads.

The SPY 137/135 Spread is looking like below

(Click on image to enlarge)

Temporary profit of $15 out of a possible $390. Probability of success 81.82%. Even with the sell off on Friday, there is still war to fight on this position. It still looks relatively safe and I'm not giving up on it just yet.

As for the RUT 750/740 Bull Put spread:

(Click on image to enlarge)

Probability of success 98.32% and unrealized profit of $165 out of a maximum possible of $255. This sexy lady is looking good, comfortable and pleasing.

Plan for the week

Two Bull Put spreads remain open in the portfolio for the November expiration cycle. That is double downside exposure and no Bear Call positions. I obviously dislike that. My plan is the same as the one laid out last week: close one of them as soon as you have a chance.

I want to get rid of the SPY 137/135 spread, my least safe position. I'm willing to close it for 0.15 debit or better.

If the market doesn't move up but stays sideways I will simply sit idle getting time decay in my favor.

If we keep falling, the SPY 137/135 will be adjusted when we hit 137.20. The RUT 750/740 spread won't be touched this week.

Market conditions right now

A new downtrend channel has been clearly formed. And we bounced beautifully off the recent lows right at the lower end of the channel. I keep having this bearish bias impregnated. There is space to hit the upper end of the channel but I think chances are low to penetrate 1450 in the next couple weeks.

(Click on image to enlarge)

Stochastics at 31 and McClellan at -64 are showing we are not oversold. 40% of stocks above their 20 SMA, which leaves some downside room.

The CBOE Index Put/Call ratio is showing a reading this week of 0.73. This is a notable change from the reading last week (1.32) and the week before last (1.33). Obviously traders are now not so well hedged against more downside. There was a drastic change in the Put/Call ratio from Thursday to the close on Friday from 1.26 to 0.73 suggesting many traders closed their put hedges on Friday taking advantage of the sell off, and cashing on their puts, but they remain under-hedged for the weekend and in front of the elections on Tuesday. So, this will be an interesting scenario I wasn't expecting and a good one to learn from.

In any case, I believe the trading range this week will be contained between 1390 and 1440. And if that's the case I don't need to be overly concerned about my positions.

Releases this week:

A week where elections will take place. Some gurus say a Romney victory will spark a rally, but I really don't bet my money on that. Again, no one, nobody, can predict this game with 100% confidence. Except those who do insider trading. So, never ever ever put all your trust on anybody predicting market moves, including me.

Monday - ISM Non Manufacturing Index
Thursday - Jobless claims
Friday - Import and Export prices, Consumer Sentiment, Wholesale Trade.

On a separate note, the November 2012 cycle represents the 12th month trading openly and publicly. My way to contribute to the trading community with more than bla bla bla, "cut your losses and let winners run", general non-sense speech of gurus and marketers selling the dream. I wanted to find something like what I have built. A simple blog of someone sharing trades, transparently accepting mistakes and showing a track record for free. I couldn't find it, so I started the journey myself. I will continue this journey, for sure, as it makes me stay focused, formulate a plan each week, be disciplined. I will take a break for the  December expiration cycle though. So, no trades for December. However, the activity on the site will continue with a few articles I have in mind. Then when December comes I will be back to war with the January 2013 expiration cycle, and you can bet on that.

Good luck this week folks!

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  1. I agree with you! I have searched all around the world something who makes this type of trading (and share it in a blog) and you are the unique.
    I'm learning Credit Spreads on indices, and you are a real gold mine for me.
    This is a very smart way to trade the markets and you are doing a great job!
    Thank you very much.

    Claudio from Italy

  2. Thanks for you kind words Claudio.
    They keep me motivated.