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Saturday, February 1, 2014

Weekend Portfolio Analysis (February 1, 2014)

SPX from 1791.03 down to 1782.59 this week for a -0.47% decline. I opened a 159/161 SPY Bull Put spread with March expiration on Monday and I also closed the Call side of the 1040/1050/1250/1260 RUT Iron Condor for profit (75% of max. profit potential in just 4 days, no reason to stay in the position).

Market conditions
(Click on image to enlarge)
Stochastics: 17 (oversold)
McClellan: -97 (neutral)
32% of the stocks in the NYSE are trading above their 20 Simple Day Moving Average (neutral)

We're not totally oversold, but we're close. I think the downside is starting to look limited. 1% - 2% further down at most this week. At that point we would be very oversold (short term of course) and chances of a rebound would be very high.

January closed with a 5% loss in the Dow Jones. Obviously, it is not going to be like that in the next 11 months as that would imply a 60% correction by the end of the year. The market was simply too overbought. Maybe it still is, I don't know. All I care about is identifying short term overbought/oversold conditions for my monthly plays, and right now it is looking close to oversold (short term). In spite of the correction this past month, the SPX is still trading inside the uptrend channel that started on November 16, 2012. Yes, channels exist to be broken. This one is no exception and it will eventually be broken too. I'm just saying,......we're still inside a long term uptrend.

Regardless of where we move in the next couple weeks, right now, with a VIX above 18, and the market almost short term oversold it is a good time to sell out of the money Put spreads. I wouldn't say the same thing about Bear Call spreads.

February positions
RUT 1040/1045 Bull Put Spread 92% probability of success with 20 days to expiration. It would take an 8% correction for RUT in just 20 days which at this point I think is unlikely. Nothing is impossible in the markets, and that's what you should always assume, but you also need to consider probabilities. 8% further down is unlikely in 20 days with an almost short term oversold market.

March positions
RUT 1040/1050 Bull Put Spread
RUT's currently trading at 1130. Still 8% above my short strike price (1050). But with 47 days to March expiration, this position could be threatened at any time. 80% probability of success, not bad. But I have my contingency plans here just in case, something I will talk about in the Action plan for the week segment.

SPY 159/161 Bull Put Spread Everything's beautiful here. SPY is very far at 178 and the position is showing a 95% probability of success. Nothing to be concerned about.

Action plan for the week
Two basic ideas:
- First, at this point I just want to add Bear Call spreads to the portfolio. I can't add to my Bull Put spread positions as there are already 3 of them and that would give too much weight to the bet that the market won't fall further. Yes, they are far away from current prices, but anything can happen, and I'm just putting my bets on one side of the market right now. However, I don't want to sell Calls at this point. A snap back rally would kill me in no time. I'll probably wait for SPX 1815 - 1820 before selling Out of the money Calls. If that happens this week, you will see me in action, probably using RUT options to complete an Iron Condor there and not occupy any margin.

- Second, I need to be careful with the March RUT 1040/1050 Credit Put Spread. I will adjust it lower down if it reaches a 30% probability of being in the Money. That probability is oscillating around 20 - 22% right now. The 30% probability will be reached if RUT goes down to 1000 1100 (thanks for the correction Jonathan) this week. That's a 3% correction in one week. Possible, but unlikely. If that happens this week, I'll close the spread for a loss and will redeploy capital in the 950 - 940 area that will allow me to recover the loss. If the market stays sideways, rebounds or only falls a little and not 3%, I won't touch the position.

Economic Calendar
Monday: ADP Nonfarm Employment change, ISM Manufacturing PMI
Wednesday: ISM Non-Manufacturing, ADP Employment Survey
Thursday: Trade Balance, Initial Jobless claims
Friday: Nonfarm Payrolls, Unemployment Rate.

Good luck this week folks!

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  1. Hey LT,

    That's CRASH, not 3% ;-)


  2. (if RUT goes down to 1000 this week. That's a 3% correction in one week.)

    1. Sorry, yeah, didn't pay attention on that one. My bad. Just fixed it.
      Thanks for your comments LEN

  3. Henrik,

    I think you mean 1100, not 1000. I like your plan on selling bear call spreads if we get to 1815-1820 area.

    1. Thanks for correcting me. You're right RUT 1100 and not 1000. I just fixed it .

  4. Hi Henrik,

    Don't underestimate this drop. We might be going down a bit more to 1710 on the spx before any real reverse happens on the daily chart.

  5. Not underestimating. In fact I already adjusted the RUT 1040/1050 down to 950/940.
    Thanks Theta.