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Saturday, January 23, 2016

Weekend Portfolio Analysis (January 23, 2016)

We started off the shortened week with a very negative tone on Tuesday and Wednesday. At one point only 4% of the stocks were above their 20 Day Moving Average, the third lowest number in a decade, behind October 2008 and August 2011.

As usual, many people thought the markets were going to zero. Literally. Asking their fund managers to liquidate their positions, resulting in one of the most severe outflows seen in recent history. Sad. But it's the same cycle that will forever repeat itself, over and over again. This predictability of Human Psychology and this overpricing of fear is what will allow us to make money in the long run. You don't make money on perfectly priced markets. The edge is in the imperfections.

In the end the market was up 1% for the week, from Open to Close, after having decimated the retirement accounts of many undisciplined investors.

Recent Trading Activity

- Closed SPX Apr29 1700/1725 Credit Put Spread for a $3,320 loss on Wednesday

- Closed SPY March 159 Long Puts for a $700 gain on Wednesday

- Initiated SPX Apr29 1475/1450 Credit Put Spread position on Wednesday

We had to take some measures on that Apr29 1725/1700 Credit Put spread. The market was still far, but "What if?". I'm happy taking that manageable loss and preserving capital. And then look at where the adjustment was deployed, down at the 1475 level. Those are just excellent odds down there. Confirming my hypothesis, that it is way easier to defend a portfolio of Credit Spreads and Iron Condors when the market is falling, as opposed to when it gets insatiably horny.

Market Conditions
(Click on image to enlarge)
Stochastics: 47 (neutral)
McClellan: -18 (neutral)
Stocks above their 20 DMA: 17.58% (oversold)

Strictly based on the rules, it is no man's land territory. However, I would add an asterisk to it. The number of stocks above their 20 DMA is still so low, that at the moment I don't think there is too much downside room. Of course, anything can happen at any time, but I believe that if we immediately fall from here, the decline will not be as severe past the previous low just made this week. Just like last weekend, I still favor some upside, and looking at the chart, that 1,990-2,000 area can now become resistance. If this is a truly weak market we might not even get there, but I feel this rebound has not ended yet. For this reason, I haven't sold Calls yet. Just waiting until at least 1960 - 1970.

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 SPX 1650/1675 Credit Put Spread
$1,225 credit. 12 deltas on that 1675 strike. No concerns at the moment. Adjustment point for this week is SPX around 1775 (down from 1785 last weekend). Probabilities starting to improve.

May27 May31 SPX 1475/1500 Credit Put Spread
$1,560 credit. 9 deltas and obviously very far from trouble.

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. I will probably need for SPX to move past 1,940.

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 $360 (profit picture will vary day to day). I plan to manage this now at a $200 profit.

April29 SPX 1450/1475 Credit Put Spread
New position initiated this week. Total credit $1,440. No concerns.

Action Plan for the Week
- If the market falls hard (SPX 1775), defend the March 1650/1675 Credit Put spread. Deploy a new Credit Put spread in the high 1400's still using March options.

- Take 50% gain on April SPY 204 Calls if the opportunity presents itself. Also take $200 gains on Victory Spread position if there is a chance to do so.

- There are 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. It is therefore a priority for me to close one of them now. I will close the March 1650/1675 CPS at a break even result or just slightly profitable this week if there is an opportunity to do so.

- If the market rallies, I will sell a May31 SPX Call spread. Hopefully the 2150/2175 spread for 2.25 credit or better. I would be entering an entire new Iron Condor this week, but given the triple exposure on the downside, which I want to eliminate, I will be at the pinnacle of my existence just by selling a Call side. This will complete an Iron Condor position with the existing May Credit Put spread.

- I will buy new portfolio insurance if volatility goes down enough with a decent rally. Currently, there is no insurance in the portfolio, and I'm fine with that as all the Credit Spreads are well positioned below 1700 and 1500. This insurance would be the defense for future Credit Put spread positions.

Obviously, the best outcome for me would be a little market rebound here, to alleviate downside exposure; balance out the risk with some short Call spreads and also be able to purchase insurance at cheaper prices. But, if that doesn't happen it will not be the end of the world. On a sideways week, I will just keep riding that Theta. And on a sell off, well, it has to fall really hard from here in order to damage any of my existing Credit Put spreads.

Economic Calendar
Tuesday: US Consumer Confidence
Wednesday: US New Home Sales, Crude Oil Inventories
Thursday: Core Durable Goods and Durable Goods orders, Pending Home Sales
Friday: Europe CPI, US GDP

With closed positions and trading costs included, we are down 2.92% for 2016 while the market is down 6.70%. The portfolio is currently 56% at risk, 44% in cash. We are very well positioned at the moment regardless of market moves. A great situation to be in.

Take it easy. But take it anyways.

Note to LTOptions members: I'm still working on the documentation update about longer dated positions. The final material should be ready by early February.

Check out 2016 Track Record

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

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