LTOptions at a 33% discount during the Year End Holidays.
Tell me More

Saturday, January 16, 2016

Weekend Portfolio Analysis (January 16, 2016)

So, last week I ran a little experiment. I published references to the weekend article twice on the main social media outlets (Twitter, Facebook, Google+). The first time, the post contained the traditional serious and boring financial chart. The second time, the reference to the article was accompanied by a picture of "Scarlett, my love, Johansson". Needless to say, the second link tripled the traffic generated by the first one. Horny humans.

Market Conditions
The venerated index opened at 1926.12 and closed at 1880.33 this week for a 2.38% decline. I mentioned last week that we were in a short term oversold environment. Now, it is important to understand that nothing is 100% certain in the markets. The fact that we are at a pessimistic extreme does not mean the market cannot go lower. The market can do anything at anytime. The pessimistic extreme just means that, based upon history, there is a good chance for markets to stop falling or at least slow down. Probabilistic outcome. Never a certainty.

That being said, playing the downside is so much easier. It is scary, I know, but you can go so far out with your positions at the moment, that it feels like a piece of cake compared to the soul-sucking 2013 Hormonal Bull environment.

If you are an Options Seller, if that is your strategy and you haven't sold Puts already, you are a serious disciple of Karl Marx and Friedrich Engels and your account deserves no growth in this life. There must some built-in defect in your brain that needs revision. Selling Puts during extremely pessimistic environments ALWAYS hurts. It is a basic survival instinct that as an Options seller you have to overcome. Conversely, traders are usually eager to sell Credit Call spreads early without too much thought, which is much more dangerous as adverse situations are way harder to defend. If you sell Out of the money Credit Put Spreads now, you can go so far out, that it is a crime against humanity not to do it. Even if the market keeps falling, like really hard, forcing you to close your initial position as it loses money, by the time the adjustment condition triggers, you can deploy the new spread down at levels not seen since 4,000 BC.

(Click on image to enlarge)
Stochastics: 15 (oversold)
McClellan: -247 (oversold)
Stocks above their 20 Day Moving Average: 6.75% (oversold)

Pessimistic extreme. In my humble opinion, crashing from here is unlikely without some little rebound first or at least some sideways action. Anything can happen obviously, but the market is already down 8% this month, while the worst January registered since 1950 was -8.54%, which happened in 2009. So, we are close to a historical record.

There are some very attractive opportunities now, for example March 1545 Puts; April 1475 Puts, both with 10% Probability of expiring in the money. Those are huge distances that imply greater than 25% corrections from the top. If those positions eventually need to be defended, the adjustments could potentially be deployed in the 1,200 or lower as fear in the markets would be overpricing all those Out of the Money Puts. So, just good odds for making money at this point.

Current Portfolio

March IWM 112/112/120 Synthetic Stock Hedged
Speculative bullish bet on the Russell Index. Max risk on this play is only $520. Don't care about it at the moment and not looking at it at all.

March 159 long Puts
Portfolio anti-crash protection. 7 contracts, total debit $476. This insurance position got to a point this week where it was showing +147% gains (around +$700), which decreased a little during the second half of the Friday session. I won't cash these gains except if the Apr29 1725/1700 Credit Put spread needs to be adjusted in the near future.

April29 SPX 1700/1725 Credit Put Spread
This position is my biggest concern at the moment. $1,440 credit. Taking some heat now with 25 deltas on that 1725 strike price. I will adjust once it reaches 30 deltas which could happen with SPX falling to around 1840 - 1845. Unlikely in my opinion, but, always possible. If the adjustment condition is triggered, I will close for a loss, and will deploy for new credits down at 1475/1450, looking for 1.80 - 2.00 credit. I will also close the March 159 Long Puts in this case to mitigate the loss. The position would bring a 3% loss for the portfolio if defended at 30 deltas. The gains on the Long March 159 Puts would bring a little +0.8% boost for the portfolio. So, all in all, it would be around a 2% - 2.2% loss for the portfolio, without considering the new credit that will be obtained with the new Apr29 1475/1450 position.

March SPX 1650/1675 Credit Put Spread
$1,225 credit. 16 deltas on that 1675 strike. Not my biggest concern at the moment. Adjustment point for this week is SPX around 1785.

May27 SPX 1475/1500 Credit Put Spread
$1,560 credit. 11 deltas and obviously very far from trouble. If this position ever needs an adjustment, the markets will be in serious correction mode, and most investors' accounts around the world will be down 25% for the year or more.

April SPY 204 Long Calls
Speculative small bullish play using only $420 debit. Less than 0.5% of the portfolio. I will close this position if it reaches a 50% ROI. And this could happen this week if SPX moves higher than 1,930.

Feb/Apr SPY 183/200 Victory Spread
Another small bullish bet, although in this case it can also make money to the downside. Max risk at the moment is only around $180 (profit picture will vary day to day). Still, I don't expect it to ever reach a $500 max risk. I will manage a winner here on a $400 gain or so.

Action Plan for the Week
- Defend the Apr29 1700/1725 Credit Put spread at the levels mentioned above. Take gains on the Long March Puts if this happens and also deploy new Credit Put spread at 1450/1475 using the same March expiration options.

- Take 50% gain on April SPY 204 Calls if the opportunity presents itself. Also take $400 gains on Victory Spread position if there is a chance to do so.

- I have 3 big Credit Put spread positions on. Even though they are at different points on the spectrum of prices, it is still too much risk on one side of the market. For this reason, my priority is to close one of them now. If the Apr29 Credit Put spread ever goes back to break-even, so that I can close without losses, or even a small loss, I will pull the trigger.

- I also think the market has room to go up to about 1970-1980. In these circumstances I will Iron Condor the May27 Credit Put spread with May Call options above the 2,200 strike price.

As Options Sellers, not all months will be rosy. In fact, it has been a very bumpy and challenging road since the end of August last year. However, frustration must be put aside. We have managed to keep our losses well under control. Remember, when the market is down 8% for the year in just two weeks, everybody is losing money: from Passive Index followers, to Select Company stock investors, to Options Sellers. Even though options sellers love the high volatility and the juicy premiums, these vertical moves always hurt and the most responsible ones will always adjust and defend their positions, collecting losses along the way. The only people making money at the moment are the pure short sellers, and well, those have suffered huge misery in the last few years. Some CTAs, with trend following strategies will also be making money given all the recent strong trends in futures, currencies and commodities. But make no mistake, other than that, almost the entire universe is in pain right now. Computing our closed positions, and including trading costs in the equation, we are now down 0.26% for the year. Yes, we have a few open positions in pain, but we won't get into a hole at all because of one or two more failed Credit Put spreads. At least, never as big a hole as those investing in Mutual Funds, Indexes, or simply long stocks.

Economic Calendar
Monday: US Markets closed. China's GDP and Industrial Production
Wednesday: US Building Permits, Housing Starts. Core CPI
Thursday: Philly Fed, Crude Oil Inventories
Friday: German Manufacturing PMI, Europe's Services PMI. US Manufacturing PMI, Existing Home Sales.

We are down 0.26% for 2016, while the market is down 8%. The portfolio is currently 55% at risk, 45% in cash.
Good luck this week folks!


If you are interested in a responsible and sustainable way of trading options for consistent income with solid risk management, consider acquiring LTOptions, my options trading system to the last detail.

Check out 2016 Track Record

Go to the bottom of this page in order to see the Legal Stuff

No comments:

Post a Comment