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
Market conditions
(Click on image to enlarge)
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
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