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Saturday, December 19, 2015

Weekend Portfolio Analysis (December 19, 2015)

The SPX index opened the week at 2,013.37 and closed at 2,005.55. That's a minuscule 0.39% loss and yet sentiment has turned extremely negative in the last couple of days. We are finally past the first Fed Interest Rate hike. No more drama. Thank Allah.

Yesterday was December expiration and both the RUT 1010/1015 Credit Put spread and the SPX 1880/1885/2190/2195 Iron Condor expired for max profit. The performance for the December expiration cycle was +1.74% before commissions, +1.29% after. For the year, the account is up +11.80% vs -2.59% for the S&P 500. I'll talk more about these numbers and the trading activity in the Options Trading - Monthly Digest article on Tuesday.

Market Conditions
(Click on image to enlarge)
Stochastics: 50 (neutral)
McClellan: -105 (neutral)
Stocks above their 20 Day Moving Average: 25% (oversold)

This is no man's land here but sentiment has become very pessimistic out there. We are close to a short term oversold extreme accompanied by a >20 VIX. This makes Put selling attractive. For example, right now, the Feb 1720 Put has a 10% probability of expiring in the money. That would be my go to play on SPX. I won't sell more Credit Put spreads just yet. First, I will wait for all 3 indicators to be signaling the oversold extreme. According to them there is still some downside room. Previous support at 1990 will be critical in the upcoming days. Once again, no crash in sight folks. If we fall 1% or 2% from current levels, that VIX may go up to 23 - 25 and you will be able to sell SPX Feb Credit Put spreads in the 1600's for decent credits, all thanks to the magical exaggeration of fear.


Current Positions
January SPX 1865/1875/2200/2210 unbalanced Iron Condor
4 weeks to expiration. The Put side taking some heat with a 16% probability of expiring in the money at the moment, but an improvement over last weekend when it was at 20%. This spread will be defended if SPX falls to around 1960. That's the estimated adjustment point for the week, down from 1970-1975 in the last analysis. If the adjustment is needed, a new Credit Put spread will be deployed in the 1725 area, still with January options. That'd be the end of the story. I would be surprised if SPX falls from 2005 to the 1700's in early January.

January RUT 1015/1025 Credit Put Spread
4 weeks to expiration and safer with a 93% probability of success at expiration. Adjustment point for the week is 1070. Down from 1080 last weekend. RUT would have to correct 4.5% in the next few days to get to my adjustment point, which to me is unlikely at this point.

January SPY 169 Long  Puts
9 contracts for downside protection. Nothing to do here. Keeping this in the portfolio until January expiration.

March IWM 112/112/120 Synthetic Stock Hedged
Betting on an eventual rebound with unlimited upside potential. No plan other than leave it there for the moment.


Action Plan for the Week
First, I will defend the Put side of the SPX Iron Condor with SPX hitting 1960 or so as mentioned above. I will also be ready to defend the RUT Credit Put spread in the event RUT goes to around 1070. Although I think there is a little more downside room, I believe the market won't go as far as the levels I just mentioned. Of course, anything can happen, I just think it is unlikely given how close to a short term extreme we are already.

We are entering the Holidays season where market participants go home to play with their kids, and gain pounds eating ice cream. Volumes should slowly dry up in the upcoming days, and activity slow down. This can only be good for options sellers. December 25 and January 1, are both Holidays and are both Friday. So, right there we have back to back shortened weeks for traders. I would like to be able to close one of the two credit put spreads by Monday, January 4th. The RUT one would be ideal and that is my goal. I don't want to have so much downside risk all the way to Jan expiration, especially considering that the next trade candidate is looking more and more like another Credit Put spread.

Last, I plan to enter a new position by Thursday. No idea how it will look right now given how close we are to a pessimistic extreme, but I'm leaning towards just a Credit PUT spread and not an Iron Condor. That may change, of course, if the markets have moved up by then.


Economic Calendar
Tuesday: US GDP, Existing Home Sales
Wednesday: Core Durable Goods Orders, New Home Sales, Crude Oil Inventories, Michigan Consumer Sentiment

Markets closed on Friday for Christmas.


Take it easy, but take it anyways.

LT


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