Folks, yesterday was a very exiting day in the markets. We had a scary bearish candle that is mostly body and no wicks, with the market closing at the low of the day. A -36 SPX points candle. Needles to say, a bar like that one is not frequent. Suddenly, all CNBC analysts are saying that it was "clear" we were going to correct and that this is not the end. Folks,...........save your electricity and your cable bill. You don't need market media for your trading. Doesn't provide you with actionable ideas, but it's really fun to turn it on in a day like yesterday for entertainment purposes.
SPX opened at 1841.05 on Monday and closed at 1790.29 yesterday for a -2.76% decline. We hadn't seen that number for a week in a while. The VIX spiked up to 18.14, the exact day after I opened my RUT Iron Condor. I was patient for 27 days without opening a new position and premiums come to inflate right the day after. Should have waited one more day, but who the hell knows anything!?!?! I'm not a retrospective trader, I'm not a left side of the chart Guru, announcing how easy it was to make a killing here or there! No!!! I'm doing this in the present! Trying to gamble on future outcomes just like you are.
Market conditions
(Click on image to enlarge)
Stochastics: 40 (neutral)
McClellan: -98 (neutral)
36% of stocks are above their 20 Simple Day Moving Average (neutral)
We're in no man's land and there is plenty of room for the markets to move in either direction. I avoid selling close to at the money options at this point, but due to the high VIX it is a good time for selling well out of the money Puts. Notice, in spite of the Friday sell off, we are still in a long term uptrend. It's no time to panic yet. There's horizontal support in the 1775 area and then along the lower boundary of the uptrend channel.
February positions
RUT 1040/1045 Bull Put Spread 94% probability of success 27 days to expiration. This position is comfortably 100 points bellow current RUT price and there's no need to do anything here.
March positions
RUT 1040/1050/1250/1260 Iron Condor
RUT's currently trading at 1144, right around the middle of the Iron Condor, which is good. The position is showing a 72% probability of success. The decline is due to the increase in volatility. I'm not concerned with this position in spite of the significant sell off and volatility spike of Friday.
Action Plan for the week
The two greater risks for Iron Condor positions are:
The second scenario is challenging as well. You entered an Iron Condor, which is a Vega negative trade, and volatility is now much higher than when you initiated the position. But unlike the first scenario, the fact that volatility expands means option premiums are rich and you can make adjustments with Put options that are comfortably Out of the Money and still obtain decent credits for them.
The March 1040/1050/1250/1260 RUT Iron Condor may face the second scenario. I will adjust the 1040/1050 Put side down to lower strike prices if/when the 1050 Put reaches a 30% probability of finishing in the money by expiration. That value right now is 19%. In theory, the 30% probability for the 1050 Put is reached if RUT goes down to 1100 - 1105 this week. If that happens, the 1040/1050 Put spread would be worth something around 2.00 dollars. And because I received 0.60 credit for them, it would mean a temporary loss of 1.40. At that point, the 950 Put (or even strike prices lower than that) would show a 10% probability of being in the money and I could use the 940/950 Put spread as my new position for 0.60 credit. Which means my real loss on the Put side of the Iron Condor would be 2.00 - 0.60 - 0.60 = 0.80. That 0.80 loss is covered with the credit received on the 1250/1260 Call side resulting in a wash for the whole Iron Condor. It's very unlikely for RUT to be trading at 950 by March expiration. A 20% market correction in 2 months. There's a lot of "ifs" in this analysis and a lot of theoretical pricing models built into the hypothetical scenarios. But the math is sound. RUT's unlikely to go down to 1100 - 1105 this week as that represents a 4% fall in just a week. If RUT does end up correcting that much it won't be this week, and by the time it happens, due to the magic of time decay, the 1050 Put option won't hit the 30%probability of being in the money. At that point RUT would have to go even lower. All I'm saying with this analysis is, the RUT Iron Condor is safe. And even in very bad situations, it won't harm the portfolio as you would think. I won't touch this Iron Condor this week, unless the 1050 Put reaches the 30% probability of being in the money, and as I mentioned, that's unlikely.
If the markets reach an oversold extreme this week, I might add a Bull Put spread to the portfolio using SPX. I'm not sure whether I'll use Feb. or March expiration. With February expiration I will sell the 1645/1650 Put spread, if I decide to go with March I can sell lower than 1600, maybe 1590/1595 or something like that. If the market rebounds and doesn't reach overbought conditions, I won't do anything.
Economic Calendar
Monday: US New Home Sales
Tuesday: Durable Goods and Consumer Confidence
Wednesday: FOMC and Chinese PMI
Thursday: GDP, Consumer spending
Friday: Chicago PMI
Good luck this week folks!
Check out 2014 Track Record
SPX opened at 1841.05 on Monday and closed at 1790.29 yesterday for a -2.76% decline. We hadn't seen that number for a week in a while. The VIX spiked up to 18.14, the exact day after I opened my RUT Iron Condor. I was patient for 27 days without opening a new position and premiums come to inflate right the day after. Should have waited one more day, but who the hell knows anything!?!?! I'm not a retrospective trader, I'm not a left side of the chart Guru, announcing how easy it was to make a killing here or there! No!!! I'm doing this in the present! Trying to gamble on future outcomes just like you are.
Market conditions
(Click on image to enlarge)
McClellan: -98 (neutral)
36% of stocks are above their 20 Simple Day Moving Average (neutral)
We're in no man's land and there is plenty of room for the markets to move in either direction. I avoid selling close to at the money options at this point, but due to the high VIX it is a good time for selling well out of the money Puts. Notice, in spite of the Friday sell off, we are still in a long term uptrend. It's no time to panic yet. There's horizontal support in the 1775 area and then along the lower boundary of the uptrend channel.
February positions
RUT 1040/1045 Bull Put Spread 94% probability of success 27 days to expiration. This position is comfortably 100 points bellow current RUT price and there's no need to do anything here.
March positions
RUT 1040/1050/1250/1260 Iron Condor
RUT's currently trading at 1144, right around the middle of the Iron Condor, which is good. The position is showing a 72% probability of success. The decline is due to the increase in volatility. I'm not concerned with this position in spite of the significant sell off and volatility spike of Friday.
Action Plan for the week
The two greater risks for Iron Condor positions are:
- When the market slowly grinds higher non stop day after day.
- During quick sell offs.
The second scenario is challenging as well. You entered an Iron Condor, which is a Vega negative trade, and volatility is now much higher than when you initiated the position. But unlike the first scenario, the fact that volatility expands means option premiums are rich and you can make adjustments with Put options that are comfortably Out of the Money and still obtain decent credits for them.
The March 1040/1050/1250/1260 RUT Iron Condor may face the second scenario. I will adjust the 1040/1050 Put side down to lower strike prices if/when the 1050 Put reaches a 30% probability of finishing in the money by expiration. That value right now is 19%. In theory, the 30% probability for the 1050 Put is reached if RUT goes down to 1100 - 1105 this week. If that happens, the 1040/1050 Put spread would be worth something around 2.00 dollars. And because I received 0.60 credit for them, it would mean a temporary loss of 1.40. At that point, the 950 Put (or even strike prices lower than that) would show a 10% probability of being in the money and I could use the 940/950 Put spread as my new position for 0.60 credit. Which means my real loss on the Put side of the Iron Condor would be 2.00 - 0.60 - 0.60 = 0.80. That 0.80 loss is covered with the credit received on the 1250/1260 Call side resulting in a wash for the whole Iron Condor. It's very unlikely for RUT to be trading at 950 by March expiration. A 20% market correction in 2 months. There's a lot of "ifs" in this analysis and a lot of theoretical pricing models built into the hypothetical scenarios. But the math is sound. RUT's unlikely to go down to 1100 - 1105 this week as that represents a 4% fall in just a week. If RUT does end up correcting that much it won't be this week, and by the time it happens, due to the magic of time decay, the 1050 Put option won't hit the 30%probability of being in the money. At that point RUT would have to go even lower. All I'm saying with this analysis is, the RUT Iron Condor is safe. And even in very bad situations, it won't harm the portfolio as you would think. I won't touch this Iron Condor this week, unless the 1050 Put reaches the 30% probability of being in the money, and as I mentioned, that's unlikely.
If the markets reach an oversold extreme this week, I might add a Bull Put spread to the portfolio using SPX. I'm not sure whether I'll use Feb. or March expiration. With February expiration I will sell the 1645/1650 Put spread, if I decide to go with March I can sell lower than 1600, maybe 1590/1595 or something like that. If the market rebounds and doesn't reach overbought conditions, I won't do anything.
Economic Calendar
Monday: US New Home Sales
Tuesday: Durable Goods and Consumer Confidence
Wednesday: FOMC and Chinese PMI
Thursday: GDP, Consumer spending
Friday: Chicago PMI
Good luck this week folks!
Check out 2014 Track Record
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