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Saturday, August 2, 2014

Weekend Portfolio Analysis (August 2, 2014)

SPX went from 1978.25 down to 1925.15 this week for a 2.68% loss. I got to enter an SPX 1815/1820 Credit Put spread yesterday taking advantage of what I consider to be a short term oversold market.

Market conditions
(Click on image to enlarge)
Stochastics: 12 (oversold)
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.


August Positions
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.


September Positions
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.


Economic Calendar
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


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10 comments:

  1. I got to run this morning, so I will post a longer comment later this weekend. I just want to say that today's blog post on how you plan to handle the existing positions is extremely good. I hope beginners and experienced credit spread traders will appreciate the well-laid plan you have put in place to protect from significant losses. Anyone can put on a credit spread trade, but when the shit hits the fan, not many will know how to adjust properly.

    ReplyDelete
  2. Thanks for those words Jonathan!
    Your comments really inspire me because I feel that I'm not sharing BS.
    It keeps me motivated to know that I may indeed help others in their journeys to learning the ins and outs of credit spreads trading.

    There's too much garbage out there and not many people walking the talk. In fact I don't know of any other site that shares their trades for free, for entire years, discussing the logic behind each step, and carrying a track record for the whole portfolio.

    I do see bloggers who share a particular trade form time to time and things like that. But not an entire portfolio approach tracking the results for the whole portfolio over long periods of time with 100% transparency and entirely for free. If you know of one I would appreciate your letting me know. I'd be really interested in following it and helping to the best of my abilities.

    Cheers,
    LT

    ReplyDelete
    Replies
    1. "I got to enter an SPX 1815/1820 Credit Put spread yesterday taking advantage of what I consider to be a short term oversold market."

      This is a very good move. I have too many put positions so I decided to keep my powder dry and deploy it if we get to 1900 next week. I am looking at October SPX 1675/1670 as my next place to sell spreads.

      "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."

      Henrik, The paragraph above is the epitome of professional credit spread trading. We wait until it is oversold to sell put spreads. We give ourselves lots of room just in case the market continues to fall. We are also mindful of position size since we don't want be "all in". We are disciplined, patient and ruthless manage the existing positions so that we don't lose sleep over them.

      "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."

      Very wise. Don't overload the boat otherwise it will sink. Time to settle back and see what the market's next move is going to be. If it continues to go down, adjust to mitigate further losses.

      "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."

      I agreed that you will not get into big trouble as long as you adjust appropriately.

      My positions below. They are mostly credit put spreads.

      August expiration:

      IWM 105/103 credit put spread (I feel pretty confident about this position, but will look to close this Friday for .02 debit)
      IWM 117/118 debit call spread (this is looking to be a loser at this point unless we rally next 2 weeks)

      August 29th expiration:

      IWM 103/101 credit put spread (got in a bit early. Showing a loss at the moment.)

      September expiration:

      IWM 103/101 credit put spread
      IWM 116/117 debit call spread (expecting a market rally. will sell if I get a 100% profit)
      SPX 1825/1820 & 2055/2060

      October expiration:

      IWM 95/93 credit put spread (started early on my October position due to the oversold condition)
      SPX 1725/1720

      Delete
    2. Thanks for the feedback Jonathan.

      Will be interesting to see how your debit spreads work over time. Of course the fact that one of them is failing at the moment doesn't mean anything. That's just one occurrence to draw any conclusion.

      Your October positions look very comfortable by the way. And overall everything else does look good too.

      Good luck this week buddy.
      LT

      Delete
  3. Hi LT and Jonathan
    It has been a tough week for me in my current position. I was up nearly 3% earlier in the week but with delta loss and increased volatility I am down 4% now. I have not adjusted on the downward side but I am very close to my personal trigger point. My short puts in SPX are 40 points lower than our current location.

    LT I also appreciate the time you invest to plan your adjustments so you are prepared and ready to act when the time is right. It has taken me a long time to learn this skill but I have been better at the craft for it. I am not as comfortable thinking in terms of probability, I tend to use delta to drive my choices. For instance my current position is at negative 60 delta. When I develop my adjustment plan (which I have pre ordered in my account so I can bring up the orders quickly from my work laptop) I try to cut the deltas down to half. Once I adjust I build a new set of orders to execute if the trend continues in the same direction.

    As I said three weeks ago, It would be nice to have a calm week this week.
    Take care
    Dave

    ReplyDelete
    Replies
    1. Hi Dave,

      Hang in there. I expect a bounce soon.

      Delete
    2. Hey Dave,
      Thanks for your comments man.
      I would say, have a defense plan in advance. Making an adjustment means taking a temporary loss, and that sucks, but sometimes not doing it could make things worse.
      I do think we're due for a small rebound in the short term. Consider closing the threatened spreads at that point if you're too sick of being threatened. Otherwise hang in there, and keep a clear and concise defense plan in mind. Execute it without second guessing it if things go wrong.

      Cheers,
      LT

      Delete
  4. Thank you for your help this week LT. You are a genius at taking the emotion out of this and helping us believe that all we have to do is follow the plan and trade the math.

    ReplyDelete
    Replies
    1. Nah, not really a genius my friend. No magic at all. Although I would say, the best way to combat your emotions is to backtest your ideas as much as possible, then paper trade them for a while to have confidence, finally always have a concrete defense plan in advance. That's how I combat my emotions.

      Cheers,
      LT

      Delete
  5. I hope August positions of 88% probability of success be true. Your assumptions do become true LT.

    ReplyDelete