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Friday, April 18, 2014

Weekend Portfolio Analysis (2014-04-18)

We reached a short term oversold extreme last week that was ideal for selling out of the money Puts. Even if you were wrong with your timing, you still had the chance to place your strike prices far out of the money due to the high implied volatility of the options. Those who entered Credit Put spread positions in the major indices saw the reward this week as the market rebounded with decent strength. SPX went from 1818.18 to 1864.85, for a 2.57% gain in just 4 days. And for me it was a pretty quiet week where I did nothing.

This was expiration week, and finally my RUT 1055/1060/1280/1290 Iron Condor expired. This was a very challenging position that started as a RUT 1020/1030/1245/1255 Iron Condor. At one point I adjusted it to 1080/1090/1280/1290 (rolling up the Puts in an overbought market was a mistake). And then finally I had to roll down the puts to 1055/1060 ending up with the aforementioned Iron Condor that expired. Due to being tested twice in the same expiration cycle and not making any other complimentary trades, April resulted in a 3.38% loss for the portfolio.

Although losing money sucks, losses are inevitable in trading. The key when selling out of the money options is to not let those negative months get out of control. I think this draw-down is nothing out of control.


Market conditions
Yellow horizontal lines below represent the short strikes of my May SPX Iron Condor.
(Click on Image to enlarge)
Stochastics: 68 (neutral)
McClellan: +45 (neutral)
41% of stocks are trading above their 20 Day Moving Average (neutral)

Total neutrality and price action in the middle of the uptrend channel. We're in no man's land here and as such, there is plenty of room to continue this rally or start a hard sell off at any time. Under these circumstances I always avoid selling close to at the the money options and prefer to wait for an extreme market to materialize, or play it with an Iron Condor but very far out of the money and with plenty of time premium to compensate the risk and increase the distance between current price action and my strike prices.


May Positions
SPX 1695/1700/1960/1965 Iron Condor 90% probability of success, 28 days to expiration. With SPX at 1865 there are no concerns with this position.

RUT 1000/1010 Bull Put Spread Out of trouble. 98% probability of success.


June Positions
RUT 920/930 Bull Put Spread 99% probability of success and well out of the money with RUT currently around 1138.

All the positions are looking good, and May in particular is pointing to be a solid +4% month for the portfolio. Time will tell.


Action plan for the week
I would like to close the June 920/930 Credit Put spread before expiration in June which is too far away. The spread is now showing a 50% return out of its max profit potential, but because it is so comfortable to ride, I will leave it there for a while until it reaches 80%-90% of its maximum profit potential.

That's all in respect with existing positions. As for potentially new positions, well, this Friday we will be exactly 8 weeks away from June expiration. For the June cycle I will go back to the SPX index or its corresponding SPY Etf if I have a hard time getting my fill. Right now, because the market is in no man's land, I would be inclined to start with an Iron Condor. My candidate now is 1680/1690/1960/1970. But of course that may change from here to Friday.


Economic Calendar
Tuesday: US Existing Home Sales, Chinese Manufacturing PMI
Wednesday: New Home Sales
Thursday: Durable Good Orders

Good luck this week my friends!

Check out 2014 Track Record


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5 comments:

  1. Good weekend wrap-up. I was very close to adjusting my April IWM 108/106 credit put spread but the market turned around Tuesday morning from a low of 108.66. I let it expired worthless yesterday.

    My May and June positions are sitting pretty. I only have put spreads at this time. I am going to look to iron condor with bear call spreads if we rally hard this month. I am looking to iron condor the May IWM 104/102 credit put spread with a bear call spread if we can get to 115/116 area. I will look to iron condor the June IWM 98/96 credit put spread if we can get to the 117/118 area. I am in no rush to iron condor if we don't reach those levels. I am perfectly happy to just have a one-sided spread.

    I also have May SPY 170/168 and June SPY 165/163. I will look to iron condor those 189/190 and 191/192 area respectively. Again, no rush to iron condor.

    I will put out a limit order to close all my spreads for a debit of .02. I hate to let things expire worthless because of gamma risk in the last couple of weeks.

    ReplyDelete
  2. We've learned the hard way, that selling Calls is serious matter. I agree with you about having no rush in Iron Condoring your positions with Calls. I think your existing positions are pretty good, and that should give you positive returns in the next couple months. Well, I know you also trade options on stocks, so overall I don't know how you will do, but these ETFs positions in particular, they look pretty good to me.

    Cheers,
    LT

    ReplyDelete
  3. Hi Henrik,

    I am not going to selling spreads on stocks anymore because I think they are just too volatile. It is not worth the risk. If I want to take a position on stocks, I wills buy a debit call spread if they fall more than 10% from their 10-day high. I will only sell spreads in rare circumstances. I prefer sticking with the ETFs. They are less volatile.

    Karen and Adam trades only the indices and they are doing great. So there is no reason to take risks in stocks.

    ReplyDelete
  4. Price action of individual stocks tends to be more erratic than that of indexes with larger gaps up or down, due to overnight moves. Stocks have earning reports. Yes, during earnings the volatility of the stock increases, which inflates the prices of options making them attractive to sell. But, outlier giant moves also tend to happen more frequently during earnings, killing your positions if they go against you. Also, earning reports happen outside of market hours, and violent moves against you don’t give you an opportunity to adjust your existing positions as the markets are closed. Stocks are subject to many more unforeseen events: Law suits, Books cooking, Insider trading and more manipulation in general. Stocks get halted and stop trading on any given period when the SEC determines there are irregularities and “the general public needs to be protected” until the “situation” comes “back to normal”. Stocks are easily influenced by a large hedge fund manager that says something about it (Noticeable recent examples of Bill Ackman with Herbalife and Carl Icahn with Apple). Stocks are subject to violent moves when changes in the management are announced (Do you remember when the news came out that Apple CEO Steve Jobs had cancer?). Indexes have none of those things! I love that.

    Many readers have approached over the years, to tell me: “Well, but you are not properly diversified. Look at me, I trade credit spreads on 10 stocks at the same time while you are only trading a couple indexes”. And my answer to that is, yes, you are trading 10 stocks which in all likelihood will move in tandem in the same direction as the general market on any given day. So, instead of having to be on top of 10 different things that will for the most part go in the same direction anyways, but are subject to a greater variety of unforeseen events, I prefer to keep it simple: increase my capital allocation in one single index and then follow it like a hawk.

    ReplyDelete
  5. Yes I agreed with everything you said. Thanks for this great reply. I appreciate the amount of work you put in to making your site such a great place for me and countless other readers to view your trades and thoughts of the market.

    ReplyDelete