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Saturday, December 7, 2013

Weekend Portfolio Analysis (December 7, 2013)

SPX went from 1806.55 to 1805.09 ending up almost unchanged. At some point on Thursday I was inclined to sell an out of the money Bull Put spread but the market didn't fall to the oversold conditions I usually look for and I needed a little more. Had I sold a Bull Put spread with a 90% probability of success, but using RUT options, the short Put option would have been in the same neighborhood as the 1650 SPX short Put I already have in January. I don't like that concentration of risk in the same area of the spectrum. So, I waited for conditions to get more oversold and that never happened. Well, so be it. On the last two down swings (November 20 and December 5) the market hasn't reached truly oversold conditions, which reminds us over and over again, how strong and stubborn this trend has been all year long.

Market conditions

(Click on image to enlarge)
Stochastics: 44 (neutral)
McClellan:-55 (neutral)
60% of stocks above their 20 Simple day moving average (neutral)
63% of stocks above their 50 Simple day moving average (neutral)

No man's land. By no means the market is at a short term extreme.  To me this is not an ideal situation for selling Calls nor Puts and according to that I will limit my self to managing existing positions.

December positions
SPX 1675/1680/1850/1855 Iron Condor. The probability of success here has increased from 75% last week to 81% right now. With 13 days to expiration I'm not overly concerned. Again it is the 1850 short Call option what could give me headaches here but I feel it is still far enough. The probability for that short Call to be in the money by expiration is only 8.88%, I like those odds.

SPX 1600/1605 Bull Put Spread. No problems at all with this position, will be left to expire worthless.

January positions
SPX 1645/1650/1880/1885 Iron Condor 79% probability of success, up from 75% last week. 41 days to go. All the strikes are safely away from current price action. This position will not be threatened this week, the market would have to rally really hard for that to happen. This is the only January position at this point and it looks comfortable. Not feeling any heat at this moment, and very unlikely to feel it during the upcoming week.

Action plan for the week
Obviously at this point I'm not interested in opening new positions until a market reaches extreme oversold or overbought conditions. That could happen this week, you never know, but in any case if an extreme is reached I will be selling out of the money RUT options against the prevailing trend in spots that beta weighted vs SPX are higher than SPX 1880 or lower than SPX 1650. That's my way to spread risk across the spectrum of prices and not have it all concentrated in one area that, if reached by price would endanger two positions at the same time.

I will also be taking care of the 1850 Short Call of the December SPX Iron Condor. As explained before, chances are high that it will be a successful position but if the less likely scenario takes place I would have to roll it up and out to January. I won't do that unless the probability of being in the money reaches 30%.

So, overall it seems like this will be another passive week for me.

Economic Calendar
Last week resulted in a lot of positive news for the US economy. Although  I never try to predict anything based on that. For example, even if you knew in advance that the jobs report was going to be better than expected, you wouldn't know how the market would have reacted. Does good news mean the Fed will stop QE? Causing concerns and creating a sell off? Who the hell knows!!! How many times have we seen the market rally on bad news and fall on good ones? Countless.

However, I still like to take a look at the economic calendar to see how busy the week will be. Busier weeks usually mean more activity, higher volumes and the potential for larger moves. That's useful information for me to know in advance how involved or concerned I need to be for the next few days.

Sunday: Chinese CPI
Thursday: US retail sales
Friday: US PPI.

Good luck this week folks!

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  1. I really like the way you trade. You are definitely a disciplined trader and very patient. I did not wait for an extreme oversold indicator to be reached when I sold the Jan 1675/1670 for .40 credit last Wednesday. I am comfortable with that position.

  2. Hey Jonathan,

    I saw your trades on twitter this week. Yes, the price levels are far enough and we all know changes are very highs for those puts to be successful. I'm willing to relax my rules to make relatively safe bets like that, but like I said, I already had positions concentrated in the same area. RUT and SPX are highly correlated and Betaweighting the candidate positions vs SPX, I was getting short approximately the same prices I was already short on SPX. That's what prevented me from pulling the trigger. No matter how safe a trade looks, I don't want to put two that are almost the same and will be in danger in around the same prices area.

    Thanks for dropping by and leaving your input once again.