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Saturday, January 5, 2013

Weekend Portfolio Analysis (01-05-2013)

SPX went from 1402.43 to 1466.47 for a +4.57% gain, which is extreme for a week. RUT went up and hit my adjustment point of 868, I closed the original 870/875 spread and opened a new one using 890/895 with February options.

The new RUT 890/895 February position looks like this:

(Click on image to enlarge)

Temporary loss of -$175 and probability of success at expiration 60.75%. Not too healthy so I might have to close it at the slightest pull back. I have $900 dollars of credit in this position (1.80 credit x 5 legs). I will happily close it for 0.90 debit, for a $450 profit.

On Friday I entered another Bear Call Credit spread. This time SPX 1520/1525 using February options. The position looks like this at this moment:

(Click on image to enlarge)

Temporary -$50 loss, nothing concerning. Probability of success at expiration 78.15%. My plan here is to take this one as close to expiration as possible and really milk it. I believe this is a solid position to be in.

Now, back to the January expiration cycle, I still have the SPY 134/132 Bull put spread open, which will expire in 13 days and looks like this:

(Click on image to enlarge)

Probability of success 99.94%. I'm going to let this one expire worthless.

Plan for the week

The January SPY 134/132 Bull Put spread won't be touched this week. Again I want to let it expire worthless, SPX is now over 120 points above 1340. It would take a real catastrophe for that loss to happen in 13 days. I'm going to take my chances. If I traded with a cheap commissions broker, I would close it.

The January SPX 1520/1525 Bear Call Spread won't be touched this week either. My adjustment point here is 1518, and that is very very unlikely to happen this week.

The February RUT 890/895 Credit Call Spread will be closed when the market pulls back. I will take $450 of profit as soon as it is available. If, on the contrary, RUT keeps going up, I will adjust further up when RUT hits 888. I'll probably open the new position using the 900/905 strike prices for a credit greater than 1.80.

If we experience a meaningful pull back (2%) I will try to sell Puts on SPX. Probably selling the 1380 Put or a lower strike. The first 5 point wide Put Credit spread yielding 0.70, that will be my candidate.

Market conditions right now

Last week it looked like the sky was falling. And in my analysis I noted that we were close to oversold levels plus close to an extreme level of pessimism supported by the CBOE Put/Call Index ratio. Those combined factors help the rage of contrarian bull rallies when multitudes of investors need to cover their shorts.

Unfortunately for me and for many that's what happened. I knew a contrarian bullish rally was in the air, due to the extreme pessimism, but I never thought it would go this far this quick. I underestimated that possibility to the point that I left my RUT 870/875 Call Credit spread opened as I thought it was far enough and later got burned on that position.

A new uptrend channel  has been clearly formed on SPX

(Click on image to enlarge)

At this very moment, we are at the very top of the range.
Stochastics at 96, very overbought.
McClellan at 173, overbought.
87.97% of stocks are above their 20 Simple Day Moving Average and 84.46% are above their 50 SMA.
The CBOE Index Put/Call ratio went from 1.30 down to 0.77

By every definition, that is overbought and extreme. The upside room looks very limited to me at this point. The 12 month high, at 1474.51 is within reach this week, but the market needs to digest the recent gains and a small pull back is in the cards now, and would also be healthy. I believe we don't have much more upside room left, at least in the short term (this week). It should be sideways, or down from here. At the most, slowly creeping higher, but a +2% rally day is very very unlikely. I may be wrong, of course, I have been wrong 1000000 times in the past. But looking at past history, comparing these overbought levels, the market is more likely to stop, trade sideways, or down.

With the bullish elephant bar the market made on Wednesday, with that solid body, an immediate pullback was unlikely. By the end of my article on Wednesday  I said  the market should be able to make a small push higher the rest of the week. And I'm no wizard, I wish I was. I simply look at past market price action. If you look at past history, reversals are very scarce the day after a bullish elephant bar like that takes place. We already had the little push higher (first part of my prediction), now the digestion or pullback is close in my humble opinion.

Possible high impact news this week:

The Economical Calendar is fairly light

Thursday - Wholesale inventory
Friday - Trade balance

Good luck this week folks!
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  1. Very good and helpful analysis. Thanks a lot!

  2. Very informative LT! Thanks!

    How do you calculate "probability of success at expiration %"?

    Also I noticed that (I'm just doing paper trade) today SPY JAN 147P with an ask of 0.85 and 147.5P with a bid of 1.07. So for a 50 cents spread you can collect a credit of 0.22? Isn't this too good to be true?

  3. Hi,

    I don't calculate it. I use the ThinkOrSwim platform for that. Just highlight your position, right click on it -> Analyze. That takes you to the Analyze tab where you can see the probabilities. Essentially the screenshots that are part of this article.

    As for the spread you mention. You get 0.22 Credit on a 0.50 spread. The problem here is that with SPY at 147.07 that trade would be a gamble. It's just to close and probabilities are not clearly on your side.

    In general, The closer you get to "At the money" strike prices, the greater the credit offered but also the lower the chances of being successful.


  4. Thank you for your blog.

    I pay a lot of attention to the Delta of the short strike as an approximation of the probability of success. In looking at your trades in 2012, your average probability of success was around 80%. Therefore I would assume your short strikes are around delta 18. Is this correct and would you mind sharing the actual short strike delta with me? I am interested because I trade with short strikes at delta 12 to 14 for less ROI but my overall results are not as good as yours. But i trade with a stop loss at 2 times the credit received and it appears looking at your losing months that you have a 3 times credit as a stop. Just curious. Any thoughts are appreciated. I really do thank you for your trading blog.

  5. Hi SEA Dreams,

    I don't really look at the Deltas directly. When I enter my credit spread trade I usually like to see a probability of success for the credit spread in the High 70's%. So I play with the difference credit spreads at different strike prices analyzing the profit picture and the probability of success.

    Also, as for the Stop Loss. I don't trade these positions with a stop loss the way you do. I do have one hard rule however, which is to adjust my positions if price gets close to my short strike (0.20 distance in SPY, IWM, QQQ and 2 point distance when trading RUT or SPX)

    Thanks for your kind words mate!