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Saturday, October 24, 2015

Weekend Portfolio Analysis (October 24, 2015)

If the first half of the year was a paradise for out of the money options sellers, this second half has proven to be a real nightmare.

Those are four very powerful punches right there with no peace in between. I have received countless emails about how much selling options sucks. Well, let me tell you: trading anything sucks. Not only credit spreads. No single trading system will indefinitely deliver superior 20% returns per year without pain. You must just determine whether trading is something you can handle, whether trading is good for you or not, and from there you decide to become an income oriented investor, or a passive index follower. Pick your poison. Nothing in the markets is stress free and safe from draw-downs. Folks, markets will get moody from time to time. From January to July I received the same number of emails about how wonderful selling Credit Spreads and Iron Condors is. Don't get moody as the market does. Manage your risk and the period of losses will be left behind at some point. If you truly have a positive expectancy strategy, all you need to do is avoid bankruptcy through a strict risk management policy and trade for a long enough period of time to give your edge a chance to manifest itself.


Market Conditions
(Click on image to enlarge)
Stochastics: 82 (overbought)
McClellan: +128 (neutral)
Number of stocks above their 20 DMA: 72% (overbought)

Compared to last week, all three indicators went down. All of them. Yet the SPX index traveled from 2031 to 2075 this week for a greater than 2% gain.

I signaled a bearish divergence last week, which played out on Tuesday and Wednesday.

But as with any divergence we never know how far price will go. Although the divergence correctly predicted short term weakness, its effect was not very pronounced. I had a Credit Call spread in play which I mentioned I would take off as soon as it showed some gains. These was the November 2100/2110 SPX Credit Call spread. For the first time this year I failed to act as I had planned. My first true mistake this year. A mistake is not having a losing position, that's inevitable. A mistake is "not following your plan", and that was the first time this year. I paid dearly. The credit call spreads, initially sold for 1.28 credit, at some point traded at only 0.80 credit on Wednesday. I should have walked away with a small gain, just as I had expressed in my action plan the past weekend. But I was greedy. I thought the market had a little bit more to fall. I did enter an order to close, but for a much lower price as I wanted a bigger gain.

Well, now we are almost short term overbought. But it is really intriguing to see a market going up so hard with fewer and fewer stocks participating. I believe this monster rally needs to be digested, at least via time (sideways action price). But, I can't trade based on emotions and hunches. Price must be respected, so I took my losses and redeployed capital farther out in the 2130/2140 neighborhood.


November Positions
SPX 1630/1640/2130/2140 Unbalanced Iron Condor
75% probability of success. 4 weeks to expiration. Alert set at SPX 2105 for this week to defend the Call side. Although I'm not too concerned anymore as this Call side is just half the size. Therefore an adjustment would not be painful.

SPX 1945/1950 Credit Put spread
93% probability of success with 4 weeks to expiration. Although I'm a little biased and believe the rally has to rest, I don't think we will see an immediate hard sell off. But, emotions aside, the mechanics dictate an adjustment this week if SPX corrects down to the 2015 area. 



December Positions
SPX 1790/1795/2135/2140 Unbalanced Iron Condor
69% probability of success, 8 weeks to expiration. Alert set at 2095 to defend the Call side. Although it is an unbalanced position where the Calls are only half the size of the Puts. So, an adjustment here would not be painful. I may deploy normal size in the 2190 area if an adjustment is needed. Totally neutralizing the loss.

RUT 1010/1015/1240/1245 Iron Condor
78% probability of success, 8 weeks to expiration. Looking good. This position is the least of my concerns as it looks safe and because it is half the size I usually play. So, if any adjustment is needed I will use full size, totally covering the loss.


Action Plan for the week
I will defend existing positions at the price levels mentioned earlier.

I am willing to close winners early as I have more exposure than usual.

I will sell a November RUT 1230/1240 or 1235/1240 Credit Call spread if we see a 2% market rally. Small size.




Economic Calendar
Monday: US New Home Sales
Tuesday: US Core Durable Goods, Consumer Sentiment
Thursday: US GDP and Pending Home Sales
Friday: Europe CPI

Stay Lazy my friends!

LT

Check out 2015 Track Record



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