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Saturday, December 12, 2015

Weekend Portfolio Analysis (December 12, 2015)

Well, at least we can't complain about boredom nowadays.  The S&P 500 went down to 2012 this week and it entered extreme pessimistic territory. We have the Fed meeting on Wednesday as the "event of the year". Therefore, we will have to be a little vigilant that day just in case our positions need to be taken care of.

Market conditions
(Click on image to enlarge)
Stochastics: 14 (oversold)
McClellan: -257 (oversold)
Stocks above their 20 Day Moving Average: 18% (oversold)

We are in the middle of a pessimistic extreme, with elevated fear reflected by the VIX at 24. This is an attractive environment for selling out of the money Puts. For instance, the 1775/1770 Credit Put spread on SPX, 0.30 credit, nice opportunity and it is 237 points below current price. Or using February options, the 1670/1665 spread, similar credit and 342 points for price to get there.

Personally, I am already committed with Credit Put spread positions, so I won't be adding more risk to the equation.

December positions
SPX 1880/1885/2190/2195 Iron Condor
Looking good and expiration this upcoming Friday. There shouldn't be any problems here. Only a 7.55% probability of expiring in the money.

RUT 1010/1015 Credit Put spread
With RUT sitting at 1123, this position shouldn't be a problem either. Expiration also on Friday. Market pricing only a 2.37% probability of expiring in the money.

January 2016 positions
January SPX 1865/1875/2200/2210 unbalanced Iron Condor
5 weeks to expiration. The Put side taking some heat with a 20% probability of expiring in the money at the moment. I may need to defend it if SPX falls to 1970-1975. In that case, I would deploy a new Credit Put spread in the 1725 area, still using January options.

January RUT 1015/1025 Credit Put Spread
5 weeks to expiration and safer. I will defend it if RUT falls to around 1080. If an adjustment is needed, it will be deployed in the 925-935 neighborhood, still with January options.

January IWM 95 Long  Puts
20 contracts for downside protection. I will probably take the gains off the market if the RUT 1015/1025 Put spread needs adjustment.

January SPY 169 Long  Puts
9 contracts for downside protection. I will probably keep this insurance all the way to January expiration date.

March IWM 112/112/120 Synthetic Stock Hedged
Betting on an eventual rebound with unlimited upside potential.

Action Plan for the Week
I will refrain from opening new positions. Unless I close one of the existing ones.

I will defend the Put side of the SPX unbalanced Iron Condor if SPX falls to the levels mentioned above. Ditto for the RUT Credit Put spread.
This is a crucial week in the markets with that Fed Meeting on Wednesday. As you know, I never trade based on hunches on where I think the market will go depending on upcoming events. I also don't care about news, beyond the fact that I like to know when the major ones will take place in order to be aware and closer to my platform, paying attention that day. However, we all tend to formulate scenarios in our heads. So, just for the fun of it, let me now describe to you my views on the possible outcomes.

There are obviously two possible scenarios: Either the Fed raises rates, or it doesn't.

Scenario #1: Rates Hike
I think that, if the Fed does increase rates, it is what the market has been anticipating and expecting anyways for a while. I believe a rate hike has already been priced in, and in my view, this scenario will cause the smaller market turmoil. Smaller moves, and this is positive for out-of-the-money options sellers.

Scenario #2: No Rates Hike
If the Fed does not hike, then in my opinion, this is where we would see violent moves. Where to? no idea, but a strong move. In the past, when the market has smelled the possibility of continuation of cheap money policies, and therefore, lack of other viable investing alternatives, it has commonly rallied. But the markets are so contradictory that a no-hike event is recognition from the Fed that things are not as good after all, that the economy here in the US is not as strong to support it and/or that the conditions in the rest of the world are not ideal either. Wouldn't a recognition of failure become, at some point, something bad for the markets?

As an options seller, I believe a no-hike scenario is what would affect me more, because that is where I see potential larger moves. But of course, what do I know. And precisely because I know nothing, I have lined up three positions with limited risk and unlimited profit potential:

Long 20 contracts of IWM January 95 Puts
Long 9 contracts of SPY January 169 Puts
These two would explode in value in the event of a sizable fall. By the way, regardless of the final decision, I don't see a crash happening. An anticipated event, regardless of his outcome, rarely, if ever, causes a crash. The Fed will use a comforting language to relieve panic, as always. However, a decent 3% fall is realistic and we must be prepared.

Synthetic IWM Long stock hedged 112/112/120
This one would bring nice gains to the portfolio in case of a relief rally after the event. Of course, my long Puts would lose money, but hopefully in either case, the gains from one alternative will more than compensate for the losses on the other one given the "limited-risk" nature of these three positions.

Economic Calendar
Wednesday: The Fed! - everything else pales in comparison.

Good luck this week folks!


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