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Saturday, October 11, 2014

Weekend Portfolio Analysis (October 11, 2014)

The S&P500 went from 1970.01 down to 1906.13 for a 3.24% decline. That's pretty significant and unusual.

RUT was even weaker and went from 1107.36 to  1053.32. A 4.88% loss. So weak that I had to adjust my 1020/1030 October Put spread. In my previous Weekend Portfolio Analysis I said "All three positions look pretty good to me and they shouldn't be a problem in the next few days". Which is right. They were looking good, and unlikely to be in trouble. A 4.88% correction in the span of a week is an unlikely event. Adjusting sucks. But it's part of the game. Perhaps the most crucial one.

Market conditions
The uptrend channel that I had been drawing for so long was definitely broken, no matter how you draw it. SPX looks poised to close below its 200 DMA for the first time since November 16, 2012. It was a remarkable rally that seems to be coming to an end if we measure it against the 200 DMA.
(Click on image to enlarge)
Stochastics: 26 (neutral)
McClellan: -192 (oversold)
15% of stocks are trading above their 20 Day Moving Average (oversold)

Very close to a short-term oversold extreme. With the VIX above 21 selling Puts is attractive here as you can go really far out with your strike prices. You can sell the November SPX 1685/1690 Put spread for 0.30 credit and 90% probability of success, or you can sell the November RUT 920/910 Put spread for 0.65 credit and also 90% probability of success. Both positions with 40 days to expiration should be winners.

As much as I love balancing my risks on both sides of the market, right now I just can't sell Call spreads, as some sort of rebound is bound to take place.

There is a bullish divergence between the oscillators and price action, which I signaled in yellow. Price is making lower lows while oscillators are making higher lows. Nothing works 100% of the time in the markets, but divergences are generally effective in the short term.

October positions
RUT 1230/1240 Bear Call Spread
Expires in 6 days. This one's going to be a winner.

November positions
RUT 970/980 Credit Put Spread
Went from 94% probability of success last week to just 80% right now. 40 days to expiration. I may need to adjust it in the future. Right now this is my most concerning position.

SPX 1755/1760 Credit Put Spread
86% probability of success, 6 weeks to expiration. Still looking good.

RUT 910/920 Credit Put Spread
This is the new position entered yesterday, so obviously there's nothing new to say about it.

Action plan for the week
I'm not a big fan of having 3 Credit Put spreads on at the same time. So, getting rid of one of them is my top priority.

If RUT rebounds this week and I can close the RUT 970/980 Credit Put Spread as a break even trade I won't hesitate.

If we go sideways this week I'll do nothing.

If we keep going down, I'll probably have to adjust the RUT 970/980 Credit Put Spread once RUT hits 1030 or so. As for SPX, if the index falls down to the 1850's I'll have to adjust my SPX 1755/1760 Credit Put Spread. Those adjustment points look far from my positions, and many credit spread traders would wait more before making adjustments. I'm just doing it based on probabilities. It is true that those points are not touching nor near touching my spreads, but with 40 days to expiration they would be around the 30% probability of being in the money, and that's my trigger. It allows me to minimize the size of the losing positions.

The EURUSD downtrend that the LT Trend Sniper System had been riding since July 17 finally came to an end on Wednesday when the EURUSD currency pair made an 8 day closing high at 1.27329.

To sum up, the entry was on July 17 at 1.3524. Exit on October 8 at 1.27349 (2 pips above what the chart shows, as you have to buy the Ask). A 789.1 pip gain after riding a trend for 84 days. The kind of patience most Forex retail traders unfortunately don't have. The stop loss had been set 83.2 pips away and the position size was calculated so that 3% of the portfolio was at risk. The profit in the end was almost 9.5 times the original risk, and the trade brought a +28.5% portfolio growth. The portfolio is now up 25.30% year to date as there had been some earlier losses in the year.

The system will enter a new short position any day this week if EURUSD closes below 1.2514.

Long term Investing
I was pretty active this week as the Canadian TSX index kept tumbling. I purchased shares of Potash Corp of Saskatchewan and Finning International on Monday. I also bought 40 additional shares of Crescent Point Energy at $37.50 on Wednesday but didn't find the time to blog about it. This is the third time I buy shares on CPG. The first time was on September 4 this year, then a few more on September 24. I now own 114 shares at an average cost of $39.91. CPG is currently paying 7.50% per year in dividends.

With this purchase on CPG.TO, my projected yearly dividend income is now 1586.78 Canadian dollars plus 409.28 US dollars.

Economic Calendar
Saturday: European Central Bank president Mario Draghi speaks.
Sunday: Chinese Trade Balance
Tuesday: German ZEW Economic sentiment. Chinese CPI and PPI.
Wednesday: US Retail and Core Retails Sales. Federal Budget Balance. NY Empire State Manufacturing Index. Business Inventories.
Thursday: European CPI. US Philly Fed Manufacturing Index, Industrial Production, Initial Jobless claims.
Friday: US Building Permits, Housing Starts, Michigan Consumer Sentiment.

Good luck this week folks!

Check out 2014 Track Record

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  1. “Adjusting sucks. But it's part of the game. Perhaps the most crucial one.”

    This is what separates the professionals from the amateurs. An adjustment is a necessary evil when trading spreads. I hate to make adjustments too but I rather live to fight another day than die as a hero in the battlefield.

    “With the VIX above 21 selling Puts is attractive here as you can go really far out with your strike prices.”

    Most traders are too scared to sell puts when markets are crashing because they believe the markets can go even lower. It is only when you have seen this type of market action year after year that you learn how to control your fear and sell spreads with confidence.

    “I'm just doing it based on probabilities. It is true that those points are not touching nor near touching my spreads, but with 40 days to expiration they would be around the 30% probability of being in the money, and that's my trigger. It allows me to minimize the size of the losing positions.”

    I have been adjusting at 30 delta too. It feels right to me even though it seems unnecessary or too cautious for most traders.

    What I did last week:

    It was a busy week of selling spreads and making adjustments.

    1. Adjusted the Nov IWM 102/100 cps to Dec5 93/91 cps for about breakeven
    2. Adjusted the Nov RUT 1020/1010 cps to Dec5 93/91 cps for a small loss
    3. Closed Nov SPX 2080/2085 credit call spread for .05 debit
    4. Added more contracts to the Dec RUT 950/945 credit put spread
    5. Added more contracts to the Dec SPX 1730/1725 credit put spread
    6. Added more contracts to the 116/118 debit call spread

    My current positions:

    Oct RUT 1030/1020 credit put spread (going to see if I can let this expire next week)

    Nov IWM 97/95 credit put spread
    Nov IWM 116/118 debit call spread
    Nov SPX 1835/1830 credit put spread (this position will be adjusted if SPX closes below 1900 for 2 days in a row)

    Dec RUT 950/945 credit put spread
    Dec SPX 1730/1725 credit put spread

    Dec5 IWM 93/91 credit put spread

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.

  2. Hi LT and Jonathan
    Pretty wild times for the moment. I too have made adjustments several times to my SPX put spreads. I'm down for the month of course but what really gets me is I have the urge to check the market movement too often during the day, when I want to be focused on other daily tasks. I like your 30 delta adjustment iron rule, and I think I may instill a similar rule to just close out based on a volatility limit so I don't have to follow too closely in wild times. The hard part, as you said Jonathan is they are often the best time to step out and sell deep out of the money credit spreads.
    Good luck to you both this week.

    1. I had to make another adjustment today. It is annoying to have to do it so soon after opening the position but we got to stick to our rules and discipline. I don't know how much more selling is left but even this too shall pass. The hardest part is to sell spreads when the markets continue to fall. I am waiting to sell more if we hit 1825 on SPX and 1000 on RUT.

    2. I hear you Dave. I too tend to check the market often when an adjustment is close to being necessary. One thing you can do, of course depending on your platform is set up sound alarms, for when a price hits a certain level, or a spread reaches a certain price. This allows you to get your eyes off the charts and do some other things throughout the day.

      As for the adjustments, the 30% probability of being in the money allows you to keep draw downs small, but at the expense of having many losses in the year which would have turned out to be winners if you hadn't touched the position. It's a bit frustrating to make an adjustment and see a rebound immediately after that. So, it's a compromise you will have to make in the end. I've come to make peace with it and adopt it as my preferred trigger.


    3. Hey Jonathan, what did you adjust, your 1020/1030 RUT Credit Put spread?

      Selling Credit Put spreads is mentally tough. The world always seems to be falling apart. It's funny how our minds work and we are so much willing to underestimate markets when selling Calls, which in the end cause greater losses and are a pain in the ass to adjust. But that's how psychology works, over and over again. I do think a rebound is due soon, but there's no 100% effective method for forecasting that. I think with the VIX above 24 it is a great time to sell Puts. In December you can go to SPX 1570 for the 10% prob. in the money! Those are great odds. With November you can go to 1635. Again great odds. If I have to adjust my Put positions I will go down to those levels where the bleeding should stop.

      I also think that, as an exception, I may consider selling a RUT Credit Call spread, even though we are not overbought, just as a hedge for my 3 Put spreads as I won't have Call exposure after this Friday.

      Good luck to you guys.


    4. Hey LT,

      I still have the Oct RUT 1030/1020 cps. I made an adjustment to my Nov SPX 1830/1825 cps. I originally received .80 as part of an iron condor. Last Friday, I closed the Nov SPX 2080/2085 for .05 debit. To close the 1830/1825 cost me 1.45 debit. I rolled into some Dec SPY 167/165 cps for .20 credit. I could have increased my number of contracts but decided to play it safe and wait for a better opportunity to sell spreads. This roll will result in a small loss for November.

      I agreed with you how people fear selling puts but are so eager to sell calls whenever they perceived the market as overbought.

      I agreed that a rebound is around the corner but I truly don't know when we will bounce.

      I don't see the premiums I want going to Dec SPX 1570. When rolling, I am adjusting to a delta of 15 to increase the credit that I receive for the adjustment. I usually like to increase my credit when VIX is high like right now.

  3. It has been over 8 months since I made an adjustment to my portfolio. This month alone I made 2 adjustment already. When my delta exceeds 30, I want to do something about the situation. I think most traders don't like adjusting because they hate to admit that the trade has gone bad. Perhaps they had some experiences in the past when the market will turnaround right after they adjust. They vowed to stick to their guns longer.

    I see adjustments as the cost of doing business. Not every month will be profitable. My backtesting tells me that I will have to adjust at least 2 months out of the year. This is my business model. As long as I don't wait too long to make my adjustments, my costs will be relatively cheap. I am willing to eat the cost of the adjustment because I know I can make it back with the roll or the following month.

    I am in this business for the long-term. I don't feel I need to make money every month to be successful. As long as I manage my losses properly, my profits will take care of themselves.

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.