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Saturday, December 29, 2012

Weekend Portfolio Analysis (12-29-2012)

SPX started the week at 1430.15 and closed at 1402.43 for a -1.94% loss. A new position for the January 2013 expiration cycle was entered on Friday when I sold a 134/132 SPY Bull Put spread. Essentially betting that SPY won't go below 134 before January 18.

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Temporary loss of -$165 and probability of success at expiration 78.81%. I entered the trade perhaps a little too early. At the time I entered, the McClellan Oscillator was not oversold yet. But the factor that is affecting this position is the spike in the VIX late in the session. That spike took the VIX to a closing value of 22.72. That elevated VIX increases the premium of Options in general and the one that I'm short (SPY 134) gets more value than the one that I'm long (SPY 132) which is farther out of the money.

But overall, good probability of success and break even point below the most recent swing low that was established on November 16 at 134.70.

The RUT 870/875 Bear Call Credit spread is also looking fine:

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Temporary profit of +$15 and probability of success at expiration 78.86%. Feels confident at this point, with a breakeven point above the highs of the year. RUT has been the strongest index during the most recent pullback. I decided not to sell Puts on RUT because it is the one with the largest room to fall. Meaning, as it has held well, it is farther from oversold conditions. That's why I chose the SPY this time.

Plan for the week

Right now it's my waiting game. I will baby sit the SPY 143/132 trade this week, and I won't touch it unless SPY goes down to 134.20. At that point I will adjust lower down. A simple simulation of price movement in the ThinkOrSwim platform reveals that if SPY goes down to 134.20 by Friday this week, and assuming the volatility doesn't increase, the SPY 130/128 Bull Put spread can be sold for approximately 0.57 credit. And that's assuming volatility doesn't go up, which won't be the case if the market falls that hard. Considering an increase in volatility I would be able to sell the 130/128 spread for more than 0.60 credit during the adjustment and only 14 days to expiration. This elevated premium so close to expiration is all due to the elevated VIX at 22.72. So, this is a great moment to be a Credit spread seller.

if RUT hits 868, my adjustment point, I will close the spread for a loss and re-open another Call Credit Spread further up probably in the 905/910  neighborhood using February options.

Combining both positions and Beta weighting using SPX:

(Click on image to enlarge)

It will all be happiness for me if SPX stays between approximately 1343 and 1458 by January 18.

We are now 48 days away from February expiration. So, it is time to start thinking about February positions. With the elevated VIX and the market approaching oversold conditions, selling Puts looks attractive. The February SPY 129/127 Credit Put spread for example is priced at 0.26. With a little market decline, this spread can easily go up to 0.30 credit giving a decent room for this trade to work. This is my best candidate as of now. Also QQQ 59/57 for a similar credit would be something to consider. The final decision will depend on which instrument is closer to the break even point, and which one is yielding a better credit.

Market conditions right now

The bearish divergence worked by the books and we've been going down for a few days now.

(Click on image to enlarge)

Stochastics oversold below 20, McClellan showing a little more downside room at -119. And 44.94% of stocks above their 20 SMA (30% generally signaling a bottom). So, there is downside room, but not much in my opinion as we quickly approach very oversold territory. SPY 137 - 138 may be in the cards, but I think it will be contained there if it happens.

The CBOE Index Put/Call ratio ended the week at 1.30 close to a negative extreme signaling too much pessimism. This also supports the notion that traders are mostly hedged, and there is a lot of pessimism which generally increases chances of a contrarian rally.

The market is obviously susceptible to the Fiscal Cliff talks, and some resolution of some kind must be found on Monday. I believe there is a good chance for the market to move either way this week based on that fact alone. Where to? No idea. Just manage your risks and have a plan outlined for each one of your positions in advance.

Possible high impact news this week:

Fiscal cliff negotiations.

Wednesday - PMI Manufacturing Index, ISM Manufacturing, Construction Spending.
Thursday - ADP Employment Report, Jobless claims.
Friday - Non Farm Payrolls, ISM Non Manufacturing.

Good luck this week folks and Happy New Year!

Check out Track Record for 2013

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