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Saturday, July 20, 2013

Weekend Portfolio Analysis (July 20, 2013)

July 2013 expiration is now in the past and the two positions that were open finally resulted in full profit without closing commissions. The month resulted in a +4.51% gain after commissions in the model portfolio and it was very comfortable to handle overall.

The SPX index went from 1679.59 to 1692.09 this week for  a +0.74% gain. The market is looking very overbought now. We all know it doesn't mean that it has to reverse immediately, but certainly the chances of that happening are greater.

Looking at a screen shot of the Market Momentum (measured by the number of stocks above the main moving averages) we have the following:

That seems a bit extreme.
Zooming in in the number of stocks above their 20 SMA for the last 12 months, we can see that around this level has been extreme in the past, forecasting a market rest or decline.

We are at a level that is not very sustainable short term.

Now, looking at the same chart of number of stocks above their 20 SMA, but five years back, this is what we have:
It's pretty clear we are at the very top of the range and going long the market at this point doesn't look like an attractive proposition. Of course detractors of market timing will say you can't time the market, which is right to some extent. Nobody can consistently time it perfectly. I do agree that we'll never know whether the reversal will happen this week, or next month. Nor do we know how deep it will be. But my take is, the upside is limited right now and the number of stocks above their 20 SMA should start to go down at some point.

August 2013 positions
August RUT Bear Call Spread (1080/1085)
With RUT at 1050 this position is starting to get some heat. Probability of success 73%.
(Click on image to enlarge)

August SPX Iron Condor(1560/1565/1745/1750)
With SPX at 1692 I'm not concerned with this position. SPX 1745 feels comfortable to me on the way up. 
Probability of success around 80%

(Click on image to enlarge)

Plan for the week
I'm not opening anything in the September expiration cycle yet. Perhaps on Friday if the VIX goes up a little this week.

As for August positions, I will wait for the market to retrace a little bit to close the August RUT Bear Call Spread for a scratch or small profit. Leaving only the SPX Iron Condor and relieving some of that pressure should the market resume it's way north. If, on the contrary we keep going up (another 1% in RUT) without pullback, I will adjust the RUT trade further up.

Economic Calendar
A lot of Housing data this week.

Monday - US Existing Home sales
Tuesday - US Home Price Index, Chinese Manufacturing PMI
Wednesday - US New Home sales
Thursday - German Business Climate Index. US Durable Goods. US Initial Jobless claims.

Good luck this week folks!

Check out Track Record for 2013

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  1. Hello LT,

    I have a question re exiting these AM settlement (SPX, RUT) option spreads. How do you do that with these wide bid/ask's? Do you exit the long and short position individually or by entering a spread order?


  2. Good question. Well, these particular ones I didn't have to exit them as they expired out of the money.
    But I know what you mean. Instruments such as SPX and RUT are hard to get filled on. That's why I usually enter the spreads (I enter spreads not individual positions) using a lower credit (.05 or .10 less than the middle) also try to enter the orders when you are not desperate. For example selling the verticals to enter, you are not hurried at that point, and many times it happens that my orders stay hanging for hours before they get filled.
    For exiting, if the spread is in trouble, you need more speed, and that is why you shouldn't want to exit right before your short strike gets in the money. I start thinking about exiting once my short strike has around 30 deltas. (30% probability of being in the money by expiration)

    That being said, it also helps to choose strikes where the Open Interest is higher. And finally, RUT spreads are easier to fill than SPX's one. At least in my experience.