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Saturday, December 21, 2013

Weekend Portfolio Analysis (December 21, 2013)

Well folks, yesterday was December 2013 expiration. There aren't any monthly December 2013 Options left in this universe anymore. 2013 is coming to an end. I still can't believe the year went by so fast. Man I'm getting old. 2013 is almost over and I'm still letting that idea sink in my brain.

The two positions that I had in December expired successfully yesterday morning. The SPX 1675/1680/1850/1855 Iron Condor with the full $425 credit, which represents a +20.48% profit in that particular trade as the maximum risk was $2075. I reflected it a little different in the Track Record. Instead of adding just an Iron Condor, I reflected two separate vertical spreads, each with its own profit and max risk. But when you consider them both as an Iron Condor, the whole trade yielded $425, which over a maximum risk or margin of $2075 represents a +20.48% return. Analyzing them separately, the Call spread side yielded $275 and the Put spread side $150.

The other position was the SPX 1600/1605 Bull Put Spread a small $80 winner or +4.17% return on capital on that particular trade.

The return for the whole portfolio in December was +3.53% or +2.98% after commissions which is what really matters in the end. The final performance for the year was +12.22%. That's net after commissions. Nothing compared to the S&P500 this year, I know, but still a spectacular +30.82% growth in the last ten months after starting the year in disastrous fashion. But I'll write a separate post just for the purpose of analyzing the results of the year and the lessons learned.

This week I closed the January 1880/1885 Credit Call spread the day before the FOMC. As I said back then, 75% of the max profit potential had been reached. There were still 30 days to expiration plus I was seeing the market close to short term oversold conditions. I didn't know the market was going to rally after the Fed meeting! Of course I didn't! I just assumed, with 30 more days to go, and at this time of the year (December and January are historically strong months) we were likely to see a rebound at some point and my plan is to reload on Calls, which I haven't done yet. But for the moment, it is good to have the first 2014 winner already and start the year with my right foot.

Market conditions
We're still trading in the most beautiful uptrend channel ever seen by human eyes.
(Click on image to enlarge)
Stochastics: 95 (overbought)
McClellan: +90 (neutral)
64.75% of stocks above their 20 Simple Day Moving Average (neutral)
63.60% of stocks above their 50 Simple Day Moving Average (neutral)

We're obviously close to the upper end of the channel but not quite there yet. We're also close to an overbought extreme but not quite there yet either. Because we're not at an extreme, as usual, I say there's room to move in either direction. I would favor the upside just because of seasonality. It's hard to ignore how strong December and January have been historically. But at the same time I think the move will be slow. I think it is unlikely to see another +2% day like Wednesday at this point. First because volumes will dry up during the holidays, second because we're getting close to overbought. So I think a slow, dull and boring move to the upside is in the cards for the next couple of weeks. The uptrend channel, which has been in play for over a year now, points to a high of 1850 by January expiration, and 1875 by February expiration. Of course, channels exist to be broken, and this one is no exception. At some point it will cease to exist. But because nobody knows when, I prefer to play it with cushion for error, by using options above those levels.

From 1950 to 2012 (and that's a lot of years) December has brought positive market returns 48 times vs only 15 negative instances. Out of those 15 negative cases, only 2 have been worse than -4% (-4.16% in 1968 and -6.03 in 2002). Visit this link for all that information. Chances of a severe correction at this point are low, and that's why I have two Bull Put spreads with January expiration and there's no fear in this soul.

January positions
SPX 1645/1650 Bull Put Spread SPX is 173 points above the 1650 short strike. 99% probability of success.

RUT 990/995 Bull Put Spread The Russell Index at 1147 is 13% above this levels. 99% probability of success as well.

Action Plan for the week
I want to sell an SPX January Bear Call Spread. With a little push higher, let's say if we hit 1830 - 1835, we would be in overbought territory. I'd like to sell the 1880/1885 for 0.50 credit or so with a 90% probability of success. If we stay sideways, or go down, this trade will never happen.

On Friday we will be exactly 8 weeks away from February expiration. Although implied volatility is low, I expect it to continue being  low in the next few weeks. So low volatility won't stop me from entering a February Iron Condor. My candidate right now is SPX 1645/1650/1905/1910 for 0.80 credit. Obviously those numbers may change slightly but the point is, I will probably sell a February Iron Condor this upcoming Friday.

Economic Calendar
Don't expect a volatile week. There's almost nothing going on:
Tuesday -Durable Goods, New Home Sales
Thursday - Initial jobless claims

I'll be flying to Florida on Wednesday morning (Dec. 25) and will be down there until January 3. During this time, please be merciful with emails. Remember I'm a one man only shop. That being said, The Lazy Trader will continue its activity and I have 3 upcoming articles analyzing the results this year in all fronts: Options, Long Term Investing and Forex. So stay tuned.

Take care folks! Good luck and Happy Holidays.

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  1. Another great weekend analysis. I think you should deploy a Jan RUT bear call spread if RUT can hit 1155 next week. 1155 represents a 5% rebound from the 1099 low set last week. Since I don't like selling bear call spreads, I will stay away from shorting this market until the global thesis changes.

    I think I already know your response. You don't like to sell the RUT and SPX around the same price point. You will probably put SPX to work first and skip the RUT bear call spreads for January unless it gets ridiculously overbought like hitting 1175 before the end of the year.

    I want to wish you and your family a happy holiday. Have a safe trip to Florida.

  2. Hey buddy,

    It's funny because I am becoming so predictable. hehehe. Yes, I will only open one Bear Call Spread in January, if I get to do it, which is still questionable. I would should SPX simply because I think it looks more overbought.

    On a separate note, I studied the idea of only selling Put spreads. Assuming you sell one every month, 8 weeks to expiration and 90% probability of success, they generally yield 0.30 credit, over a 4.70 max risk, and can be placed 10% - 12% bellow the market. Assuming you win them all and placed 15% of your capital to work every month, that would result in a 12% - 14% portfolio performance for the whole year. Not bad. But I still refuse to stop selling Calls. If you add a two or three Bear Call spreads in the whole year to that theoretical returns with Puts, then you are already close to a 20% portfolio return annualized.

    We would have to look at the history, but I don't think there's an instance where the market rallied +25% back to back years. Most studies suggest that after a very strong year, the next year is usually positive as well, albeit not by the same huge numbers.

    Thanks for dropping by and for your support all year.


  3. Hey Henrick,

    Thanks for the quick response. I like your idea of only selling 2 or 3 bear call spreads during the year when it is extremely overbought. I will have to consider this idea for next year since I don't think we will have another 25%+ return on S&P in 2014. I also think that the Fed will stop QE by end of 2014. So this will cause markets to be more volatile.

    The guy who sells only put spreads recorded his 28 consecutive months of winners yesterday. None of his put spreads this year needed adjustments. His performance this year is close to 40%.

  4. I saw his trades. I saw he regularly places 4 trades a month using IWM, RUT, SPX and SPY and about 50% of the portfolio. It will be interesting to see how he reacts when a strong correction appears that forces him to defend 4 highly correlated positions in the same market direction, using half his portfolio. It will be interesting indeed. He's taking huge risks, and has been rewarded nicely so far. Good for him, takes some balls to trade that way.


  5. Just saw his track record again and in fact he uses 100% of capital. Man,....that's pretty scary. It all looks safe as the strikes are well below the market, but that style definitely takes some guts. Here's the link for those wondering what we're talking about