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Saturday, July 19, 2014

Weekend Portfolio Analysis (July 19, 2014)

The July 2014 monthly options expiration cycle is now in the books. And yesterday the following two July positions expired yielding max profit:
SPX 1735/1740/2010/2015 Iron Condor
SPX 1805/1810 Put spread

I have to say July was not a great month for me in terms of portfolio growth, but I think it was a victory in other aspects. I started with the wrong foot from the get go with a 1735/1740/1975/1980 Iron Condor whose Call side had to be adjusted. This adjustment caused a temporary loss and made it tough to pull off a spectacular month. However, in spite of that initial loss, I managed to end up in positive territory. I also played my first Double Calendar successfully after studying these type of positions for about a year.

Portfolio return in the end was a discreet +0.57%, and that is after fees and all that jazz. As a credit spread seller, any month where you have adjusted positions you're usually bound to have bad results because of the typically unfavorable risk/regard profile of these trades. I consider it a huge success if I finish off these months with positive returns.

Because of the nature of high probability trades, I'm about to have two or three months in a row free of complications. It's in the month with losing positions, like this one, where much of the year result is decided.

The performance year to date is now +9.44%. Nothing spectacular, but I'm proud of the work done in this market. A market that has given very little opportunities to premium sellers. I think I have been fairly conservative with my positions and the way I have managed them throughout the year. Overall I want to believe I haven't been taking huge risks. So, taking that into account, +9.44% year to date is decent with five more months to go. Looking forward, both August and September are looking pretty good and could potentially sky rocket the YTD return to +15% by September expiration.

Market conditions
The SPX index opened the week at 1969.86 and closed at 1978.22 on Friday. That's a +0.4% gain despite all the geniuses talking about the end of the world, Ukraine, Russia, Israel, Palestina, bla, ♪ bla-bla ♪♪ bla.
Selling options as a contrarian takes guts. In life, most people are wired up to be too influenced by what is happening "now" and assume the current behavior will continue. Specially in negative situations. That's why when the market is falling people always think it will fall a little bit more, and when it does, they still think it will fall a little bit more and so on. Selling puts under such circumstances is mentally tough. Not only are you going against the herd. You are also going against yourself. Your natural conservation instincts. I've been doing this for a while, and every time I sell and out of the money credit spread against the trend, I have the feeling I made a mistake. Even if I enter at the perfect readings of the indicators I usually follow. Even if history has proven to be on my side. In the end it works. So, you have to keep doing it. You have to trust your system, hours of preparation and study. Ignore the MarketWatches of the world, Bloombergs, CNBC's etc. Selling the RUT 980/990 Put spread on Thursday was the trade! What are you gonna do? Sell now? The train has moved on kid. Well, you can still sell a decent put spread there, but the optimal point was during Thursday's session.

(Click on image to enlarge)
Stochastics: 63 (neutral)
McClellan: -80 (neutral)
36% of stocks are trading above their 20 Day Moving Average (neutral)

No man's land here. Market with potential strong moves in either direction. At this point I will simply wait for an extreme in order to sell front month options via credit spreads. I can also consider selling an Iron Condor in the back month with plenty of time premium to compensate the risk of potentially violent moves.

August Positions
RUT 1050/1060/1260/1270 Iron Condor. 90% probability of success with 27 days to expiration. RUT hovering around the 1150 mark. Unlikely to threat my short strikes this week.

September Positions
RUT 980/990 Bull Put Spread. Opened this position with a 90% probability of success and just one day later the market rebounds. The probability of success has increased to 97%. Very comfortable spread at this moment. Will ride it for a while.

Action plan for the week
Nothing needs to be done to the existing positions. They are healthier than I am, and very unlikely to receive any threat this week.

As for potential new trades, I'm not done with August yet. I'm  willing to sell a credit spread in August and my candidate is the SPX 2040/2045 one. Comfortably above the uptrend channel. I just need a credit of 0.50 or better. That's the tough part. As of right now, the index would have to go up by about 20 points for that to happen.

I'll also consider adding an SPX Iron Condor with September options by Friday. My candidate right now is the 1795/1800/2055/2060, but that usually changes a little bit in five days. I'd like a credit of 0.80 or better for this position.

Economic Calendar
Tuesday: CPI, Home Sales
Wednesday: Chinese Manufacturing PMI
Thursday: European Manufacturing PMI, US New Home Sales, Initial Jobless claims
Friday: Durable Goods Orders

Good luck this week my friends!

Check out 2014 Track Record

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  1. Hi LT and Jonathan
    Well that was an interesting week.
    LT you made a very well timed entry on your RUT credit put spread. Some traders must have lost a little bit chasing puts at the height of the fear on Thursday, in order to protect their capital. But as you mentioned LT the most important lesson is to protect your losses in bad months so you can be there for the good months. So hats off to all who adjusted as needed so they can stay intact.
    I had already closed my JUL position for the 4% gain on Monday, and entered a similar position for AUG, so I had nothing to do on Thursday but watch and evaluate where I stood. The SPX volatility rose 30-40% that day depending on where you put your high/low points, but SPX was only down 1.25%. I was down 4% (all of my JUL gains) just on the volatility increase, but my short strike puts are at 1890 so I did not feel too threatened. I did have some protection from a single insurance PUT I hold at 1870, and it was helping to put the brakes on volatility losses. Just the same I was pleased to see things calm down on Friday.
    Let’s all put in a suggestion for a calmer week this time around.
    My best to you all

    1. Yes, I also noticed that in spite of the sell off in RUT and spike in volatility, the SPX index barely went down. Makes me think this market is still strong and could continue that way for a while.

      Amen, calmer weeks when we already have positions. Volatile with when we want to enter something new.


  2. Congratulations on your July positions expiring for max profits. You had a month where you made an adjustment but ended up with a slight gain. This is a very hard thing to pull off. You should be extremely proud of yourself. Your YTD performance is great. Most hedge fund managers would kill for 10% right now. I think you can end up with 20% or more by the end of the year.

    Selling credit put spreads when the market is falling hard is a very difficult thing to do. Even with many years of experience and knowledge selling spreads and spending countless hours backtesting SPX/RUT going back 30 years, you always think that this is a crazy trade and you should wait until the market stabilizes before risking your money.

    When every cell in your body is telling you to not make the trade, it is usually the right trade to make. When the market is oversold, we sell bull put spreads. When the market is overbought, we sell bear call spreads. The contrarian trade is the one that usually works out. We also look for 90% - 85% probability of success trades. We only sell spreads that is at least 85% probability of success since we need to respect the market. We just never know for sure if the market will continue to fall more or go up higher. We always leave room for the possibility that we can be wrong with our market timing.

    I just finished watching Karen the Super Trader 2014 interview again. Tom asked her how can she sleep at night knowing she is putting so much money at risk. She said that it is all in the statistics and probabilities. When you are trading with 95% probability of success as Karen is doing, you should come out a winner almost all of the time.

    My current positions:

    August IWM 105/103
    September IWM 103/101
    September SPX 2055/2060

    Last Friday, my July IWM 95/93 & 123/125 iron condor expired for max profits. My 123/125 bear call spreads were tested early this month but it worked out in the end. During last week’s collapse on IWM, I closed the August 126/128 bear call spreads for .02 debit. I originally sold it for .10 credit so I made .08 profit. I might sell another August IWM bear call spread if IWM goes into overbought territory this month. I am also looking to iron condor my September IWM 103/101 bull put spreads once we get an overbought condition again.

    On Friday, I sold September SPX 2055/2060 to hedge agains all my long positions. Something tells me that we will see some volatility next week. I am looking to sell September SPX 1825/1820 for .40 next week to iron condor with the 2055/2060.

    1. Wow that was a lengthy comment. If you do this every week, you can pretty much set up your own blog and earn some advertising money in the meantime!!! haha.

      Ok, let's see.
      I do hope I end up above 20% this year. Time will tell. But it is realistic.

      As for tasty trade and Tom's question to Karen. I think just as Karen. She's not so rolling the dice as you would think. She also has laddered positions. Meaning she doesnt enter everything on the same strikes. She enters a few positions here, then the market keeps falling, she enters a few more using new strikes and so on. So, probabilities are on her side to win most of the time. The only time she will lose, and lose big is on a continued move in the same direction. A 1987 crash type. But those events are really infrequent, what 4 - 5 times in a century ? So, in the meant time she will keep reaping the millions. And it looks like the profits are taken away from the accounts and distributed to employees and investors every year, which is the smart thing to do with her trading style in my opinion.

      Your positions look really good. And looks like you stopped trading verticals on individual stocks! Welcome to the boring yet stable side of options selling!


  3. I am trying to emulate how Karen trades by selling credit spreads rather than selling naked puts and calls. I like the idea of laddered positions since you don't want to commit too much capital into one position. It does not give you enough flexibility. I also like her idea of closing the position if it shows a nice profit a few days after putting it on. Otherwise, just let it expire. I think it is prudent that she is taking some of the profits out. Her style of trading will work in most years but we know that the markets do have some tough moments every few years.

    BTW, I got filled on my September SPX 1825/1820 for .40 credit this morning. Now I am happily iron condored with the 2055/2060 for September. I will add to the 1825/1820 position if SPX goes down to 1950 this week.