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Sunday, October 11, 2015

Weekend Portfolio Analysis (October 11, 2015)

Hello fellow traders,

Today I'm writing to you from sunny and colorful West Palm Beach, Florida on a quick weekend trip to enjoy the beautiful things in life.

(Do not click on image to enlarge, it might be dangerous for you psyche)

I know these pictures don't hurt too much now, but boy oh boy will they be a pain in the a.. come November - March, once 50% of the US is covered by snow and 99.8% of Canada. But so far they don't hurt..........yet. So, please keep coming to this site so that my writing on it makes sense!

By the way, there is this Rapids Water Park here in WPB, phenomenal. Simply phenomenal. Makes the "Wonderland" water park from my beloved Toronto look tiny by comparison. Highly recommended.

But, wait a minute?!
This is not a traveling site?!
Nobody comes here looking for traveling advice or hotel reviews. This is not The Lazy Trader's adventures throughout North America and you certainly don't care. You came here to talk markets. So, markets language shall be spoken. Let's get down to it shall we?


Market Conditions
(Click on image to enlarge)
Stochastics: 97 (overbought)
McClellan: +280 (overbought)
Number of stocks above their 20 Day Moving Average: 73% (overbought)

We're in a short term overbought extreme. Ideal circumstance for Out of the money Call selling which is what I did on Thursday with my most recent RUT play. Usually, at least in the last few years, by the time the market makes it to this extreme the VIX is already too low making Credit Call spreads less attractive as you have to get closer to the price of the index in order to obtain a decent credit. However, not this time. The VIX is still above the always nice 17 which is still a decent number for the options selling business.

I recently mentioned that in the longer term, there is still more upside room as evidenced by the fact that the number of stocks above their respective 200 Day Moving Average is still an anemic 35%. But, with my plays I'm only concerned about a few weeks ahead and right now according to my rules it is time to bet on a retracement or at least a pause.

As for Put selling, I don't believe it is the ideal time. Nobody ever knows where the market is headed but after such a strong move, it may be time to be careful with the downside.


October positions
SPX 1700/1710/2195/2200 unbalanced Iron Condor
Will expire on Friday morning without problems.

RUT 980/970 Credit Put Spread
Will expire on Friday morning without problems.


November positions
SPX 1630/1640/2100/2110 Iron Condor
6 weeks to expiration, 76% probability of success. No concerns with the Put side. A little attention will need to be payed this week to the Calls.

RUT 1235/1240 Credit Call
6 weeks to expiration. RUT closed the week at 1165 so for now I'm good but on the alert.


Action Plan for the week
No more new positions. Time to strictly focus on the defense.

No concern about the October positions. Both will be left to expire for max profit on Friday.

Now let's talk about November positions.
If RUT goes up by about 40 points during the week. That is, to around 1205 I will be forced to defend my 1235/1240 Credit Call spread. Of course I think this is unlikely as it represents a 4% rally on the back of an almost 8% rally in the last seven days. But, everything is possible and we have to be ready. So, if RUT hits 1205 this week, I'll be adjusting my credit call spread up to the 1265 area, Ideally above 1270. This way I will neutralize the damage. By the way I'm playing this position with half the usual size, so the loss would be smaller than usual and an adjustment with normal size would allow me to collect more credit. So, in the end it would be a watch overall. No loss when combining all the credits and the adjustment.

As for the SPX Iron Condor, the concerning part might be the Call side too. If SPX moves up about 2% this week, to about 2060 I will be adjusting the 2100/2110 Call spread to ideally above 2140, which is beyond all time highs.

So, I already set up price alerts in my platform: RUT at 1205, SPX at 2060. Those are my decision points. I think they are unlikely to be seen in just a week, but again, we have to play good defense in order to maintain a smooth and healthy equity curve in the long run.

I'm a little over exposed on the upside and this is one of the situations where I will strongly consider closing spreads early. If the market retraces and my SPX Credit Call spreads go back to being profitable, there is a good chance I will close them. Leaving only the RUT one.


Economic Calendar
Monday: China Trade Balance
Tuesday: German Economic Sentiment. Federal Budget Balance. China CPI and PPI
Wednesday: US Retail and Core Retail Sales. PPI
Thursday: Crude Oil Inventories, Philly Fed Index, CPI
Friday: Europe CPI. US Industrial Production and Michigan Consumer Sentiment.

That's it for this week folks!
Thanks for dropping by and good luck. See you next time!

LT

Check out 2015 Track Record


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