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Saturday, February 8, 2014

Weekend Portfolio Analysis (February 8, 2014)

So did we get a rebound or what? The week started with a nasty sell off on Monday. At one point the number of stocks above their 20 Day Moving Average was only 16.14%. That's really extreme. And then the snap back rally came. I pity those who sold Calls after or during Monday's sell off. It was the right time to sell Puts, not so much Calls. Anyways despite the correction the market had a positive week, with SPX going from 1782.68 up to 1797.02 for a +0.80% gain, and with that, the family of Bull Put spreads that I've been raising is healthy and happy again.

Market conditions
(Click on image to enlarge)
Stochastics: 59 (neutral)
McClellan: +45 (neutral)
35% of stocks are above their 20 Day Moving Average (neutral)
43% of stocks are above their 50 Day Moving Average (neutral)

This market is not in overbought nor in oversold territory, and therefore there is plenty of room for violent moves in either direction. I tend to not open positions under these circumstances, and in the event I do I prefer to use Iron Condors rather than just exposing my self to one side of the market.

February positions
RUT 1040/1045 Bull Put Spread   94% probability of success, 13 days to expiration. RUT's priced at 1116.55 right now, that is 71 points away from the short option or 6.4%. I think this position is going to be a winner and after the rally, it is looking comfortable.

March positions
RUT 940/950 Bull Put Spread The old RUT 1040/1050 Put spread was rolled down to this 940/950  on Monday. Yes, we were at a short term oversold extreme, but that is  no excuse to not manage risk. I can't advocate that because "what if?". The market can do anything at anytime. As a contrarian you make bets based on probabilities but there is a point when risk management comes into play when your initial bet seems to be going against you. I know, lately, many specialists claim that you just let the probabilities play out without adjusting, and be that as it may. For example TastyTrade advocates that, and they have shown several studies demonstrating why it makes sense, as long as you keep your position size very small. But psicologically speaking, I just don't feel comfortable with that approach, and with the idea of needing 10 winners just to recover one loss. So I adjusted. I lost a little bit of money, yes, but it's not the end of the world and it can be recovered quickly. What is more important is that my equity grows smoothly, and that I don't get depressed by the game. This new 940/950 Put spread is obviously looking very healthy now and it is the perfect candidate to take all the way to expiration and let expire worthless without closing commissions.

SPY 159/161 Bull Put Spread Obviously looking very healthy as well with a 98% probability of success.

Action plan for the week
Because all the Bull Put spreads are in good condition, I won't need to touch any of them. At the same time, I don't want to add another one. So, if the markets fall this week, I won't enter new positions. Even if the markets fall hard, I have plenty of room.

If we start to go sideways, I won't add new positions either.

I would like to sell either SPY Calls or RUT Calls with March expiration. But for that I need some clear overbought conditions. I think I won't see that this week. But who knows. A 2% - 3% push higher will attract me to complete the SPY or RUT Iron Condor. Selling SPY Calls above 190 or RUT Calls above 1220 would be ideal. If we don't see this push higher, then I'll do nothing this week.

Economic Calendar
Pretty light week ahead

Tuesday: China Trade Balance
Wednesday: US Federal Budget Balance
Thursday: US Retail Sales. China CPI

Good luck this week folks! I will be out of the country next weekend with limited internet connectivity. Chances are high there won't be a Weekend Portfolio Analysis.

Check out 2014 Track Record

Go to the bottom of this page in order to see the Legal Stuff


  1. I have a Feb RUT 1050/1040 that is looking pretty good right now. If we stay above 1100 by next Friday, I will most likely close this position early just to lock in the gain and free up margin. I don't want to hold until expiration this year unless the position is very far OTM.

    I will be very surprised if we go up more than 2% next week. I think it will be a while before the market becomes extremely overbought again. My thesis has changed and I am more bearish than bullish for the first half of this year.

    The market is digesting the irrational exuberance from last year. Jobs data, Fed tapering and sluggish economies around the world does not support extreme bullishness at this time. I expect credit spread traders who are nimble to do well this year due to the higher levels of volatility and a less one-sided market. I suspect we will see the SPX/RUT going below the 200-dma sometime this year before the correction is officially over. A 10% correction is a high probability event at this point.

    My March positions are also looking good. On SPY, I have 162/160 and 159/157. If we go up a little more next week, I want to close the 159/157 for profit.

    I also have RUT 1000/990 and 950/940. They are both in great shape.

  2. Thanks for your comments!
    I also think the market is bound to touch its 200 DMA this year. Based on historical evidence, it is due. So as the year progresses, chances just become higher. But I can't sell Calls for the sake of doing it, even though I may have a Bearish outlook on the market in 2014. Selling Calls is dangerous business, and I prefer to sell them with confidence (during overbought markets) or else I'm just happy not selling them at all.

    PD: You have pretty good positions.

    1. LT,

      I have a money management question related to selling calls. What portion of your account do you allocate to selling calls, and how do you compute the potential risk (for example: factors such as book value x # of contracts vs. size of account/% of account?)


    2. Hi Smiddywesson

      I use 15% - 20% of the account as margin for one trade. That is the maximum risk. But I never let price action penetrate the short strikes. I adjust the position much sooner than that. So the typical loss causes a 2 - 5% drawdown in the portfolio

      By looking at the track record page and visiting the links for each trade you can pretty much figure it out.


  3. Great Analysis as always LT.
    I want to ask if you have any email I can write to. I was studying a new strategy for moments of uncertainty like this and I want you to check it out.

    Thank You.

  4. Hi Manuel.
    You can shoot me an email at

  5. The Nikkei led us down in January, beginning a four week plunge in the first week of the year that the US markets followed 3 weeks later. Both markets bottomed at the start of February, and now the Nikkei is mimicking a dead cat while the US markets continue to rally.

    "I tend to not open positions under these circumstances

    Hard to argue with that. As traders, it's our jobs to manage risk, not run from it, but that doesn't mean we have to take risks all the time or when there's less suggestion of potential rewards. What's next for US stocks is anybody's guess, but I wouldn't be too active in this market eitherr, at least not until we bust through 1840.


  6. Thanks for your comments Smiddywesson