(Click on image to enlarge)
McClellan: -279 (oversold)
21% of stocks above their 20 SMA (oversold)
The index is trading near the lower end of the uptrend channel that started since the beginning of time (November 16, 2012), and we have reached a short term oversold reading. I think we're due for a rebound soon. With the expansion in volatility, it is a nice time for selling out of the money Credit Put spreads if you haven't done so already. Give your self room for error. Sell out of the money. Although I think we're due for a rebound, it may not happen immediately. Nobody can predict anything but looking at history and the combination of these three readings, chances are higher for a rebound at this point.
RUT 1050/1060/1260/1270 Iron Condor. 88% probability of success (down from 94% last week). Only 13 days to expiration. RUT's priced at 1114.86 right now. Almost 55 points (5%) above my 1060 Short Put. That's not bad at all. That Put is showing a 16% probability of being in the money by expiration. This position is not a sure winner, but I like my odds here.
SPX 1815/1820 Bull Put Spread this was the new position initiated yesterday. Obviously nothing new to say here.
RUT 980/990 Bull Put Spread. 92% probability of success (down from 97% last week). Still a very comfortable spread at the moment. Will keep riding it for a while.
SPX 1815/1820/2065/2070 Iron Condor.With the expansion that took place in volatility this week, the position is showing a discreet 68% probability of success. Even though the current SPX price of 1925 is well above the 1820 Short Put, those Puts now have a 22% probability of being in the money. I'll have to be careful with this one.
Action plan for the week
Ok, so no new trades at this point. Too much exposure already. Time to play defense. If I enter new positions it will only be for adjustments and defensive purposes at this point.
August positions look good. The short Put (1060) of the RUT 1050/1060/1260/1270 Iron Condor
reaches a 30% probability of being in the money if RUT goes down to 1090 which is more than a 2% fall. I would consider that significant and unlikely at the moment. But, anything can happen and you must always be prepared. If the 1060 short Put hits that 30% probability number, I will close it for a loss. The 1050/1060 spread would be worth around 2.20. I opened it for 0.60 credit (as part of the Iron Condor), so the loss would be 2.20 - 0.60 = 1.60 or $320 bucks in two contracts per leg for the Model Portfolio. I would immediately sell a further out of the money Credit Put spread with a 10% probability of being in the money. This new spread would be worth anywhere from 0.50 to 0.60 credit (10 point wide spread) and I would play more contracts (3 for the Model portfolio and that's at least $150 credit). Presumably the new spread would be deployed in the 1000-990 area which I consider very unlikely to be penetrated in just 13 days. As a result, the whole Put side of the Iron Condor would bring a $170 loss after the adjustment (assuming the adjustment is successful -$320 loss + $150 new credit). When considering the credit accumulated via the Call side (1260/1270) of 0.90 or $180 for two contracts per leg. This is a wash (no loss) and possibly a small profit. Not a bad result for a threatened and adjusted Iron Condor.
The September SPX 1815/1820/2065/2070 Iron Condor may also need an adjustment. In fact it is more likely for this one to need an adjustment than it is for the August RUT Iron Condor mentioned above due to the fact that there are still 7 weeks to September expiration. So, time to design a plan.
According to theoretical models, the 1820 Short Put reaches a 30% probability this week if SPX goes down to 1890 (almost a 2% fall which, again I consider unlikely for this week, but anything is possible in the markets). When that happens, if it happens, the 1815/1820 spread would be worth 0.90 to 1.00. Let's assume the worst scenario of 1.00. I would close the spread for a 0.70 loss (1.00 - 0.30 credit received = 0.70) or $280 in 4 contracts per leg. I would immediately sell a 90% probability of success Put spread for 0.30 way down around the 1700 - 1690 area and I would add more contracts. Let's say 5 contracts for the model portfolio which brings an additional $150 credit. If this new position ends up being successful, which I think is very likely, the whole Put side of the Iron Condor would have caused a $130 loss (-$280 for the original Put spread that resulted in a loss + $150 new credit for adjusted position). That $130 loss is more than compensated by the $200 credit received on the Call side (2065/2070) resulting in a small profit overall for the portfolio.
There's a lot of theoretical models and ifs here. But the numbers don't lie. I'm very confident that these Iron Condors will not hurt me in any significant way. They will be a scratch if not a slightly profitable venture. Of course, I'd rather not have to adjust anything as that would limit the progress of the model portfolio, but if it ends up happening, it won't be the end of the world. Both, August and September should be positive months for the portfolio.
Light week in terms of news.
Tuesday: ISM Non Manufacturing PMI and ISM Non Manufacturing Employment
Thursday: Initial Jobless claims
Friday: Chinese CPI
Good luck this week my friends!
Check out 2014 Track Record