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Saturday, January 30, 2016

Weekend Portfolio Analysis (January 30, 2016)

Little by little, as the market moves back up, all the gurus start turning bullish, hoping we forget the ultra-cataclysmic calls made two weeks ago. By the time they are all convinced bulls again, the next sell-off is around the corner.

I spent a good part of the month, especially the first half, comparing the market return with the worst Januaries in history. My basic argument was that we were near a bottom (I tweeted a couple of times about this). Of course I started saying that with SPX 1,865 and it still hit a low of 1,812 (3% lower). Did I pick a bottom successfully? Well, it was not my intention to pick an exact bottom. Which is next to impossible. The adjective "close" is a bit subjective don't you think? I was simply using past statistics as a comparison point to strengthen my analysis. Had January closed at 1,865, it would have been the worst January in history, beating the -8.54% of 2009. Records exist to eventually be broken, but breaking a historical record is not something we see frequently, especially those that have been established after several decades of history. So, my guess was to naturally assume that by the end of the month we would be above 1,865, and, if lower, well, not too far from there.

The purists, the traditionalists, the frustrated academicians, the passive investor, all will point to the flaws in my analysis, arguing that past statistics are meaningless, that I am curve-fitting, that my trading is based on assumptions using historical data, wah-wah-wah. Let me tell you: Past Data folks, is the only thing we have. And EVERYBODY uses it. Even the most passive index follower is relying on past data, and counting on it, assuming that "in the long run, the market always goes up". Isn't that relying on past information to formulate a thesis? How is it different? In a much less complex manner, the passive investor is also using past data to defend his argument and strategy. Thank Allah we embrace past data and use it to our advantage.

Recent Trading Activity

- Closed SPX Mar 1650/1675 Credit Put Spread for a $35 gain on Wednesday

Market Conditions
SPX up 1.8% this week, and now we enter the type of environment that is so dangerous for Options sellers, where the Alpha we have accumulated can evaporate with a market that recovers its lost ground in the blink of an eye and in addition, may hurt bearish positions. It is in this environment, the super rallies, the snap-back rallies where we have to be very careful.

If we get hurt with bullish bets (Credit Put spreads) during market sell-offs,.....pppffffffff, who cares? we are probably outperforming the market because it had to fall significantly in order to hurt our out of the money Puts. So, we are better off any way, than say, the person who is long the index. However, when we get hurt on Bearish Call Spreads, it is a totally different situation. Not only is the market rallying, approaching our performance and making our trading approach questionable, but also we may be adding our own losses to the equation if we become recklessly short. This combination of strong market rally and losing Credit Call spreads can result in a significant +5%, +10% previous out-performance totally vanishing in barely a few days.

(Click on image to enlarge)
Stochastics: 81 (overbought)
McClellan: +185 (overbought)
Stocks above their 20 DMA: 51% (neutral)

No man's land here and quickly approaching a short term overbought extreme. I guess mentioning the possibility of SPX 1,990 - 2,000 now doesn't look as stupid as it did last weekend, and the weekend before that.

The VIX is still elevated and selling a sweet unbalanced Iron Condor here is a good play in my book. For example May31  1550/1575/2150/2175 looks attractive. Of course, I already have two Credit Put spreads on, and won't be entering a new Iron Condor. If anything just the Call side to complete, but that's just my personal case. I'm still throwing the idea out there, as attractive, addictive articles shall be written for the betterment of humanity.

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.

May31 SPX 1475/1500 Credit Put Spread
$1,560 credit. 7 deltas and very far from trouble.

April SPY 204 Long Calls
Speculative small bullish play using only $420 debit. Less than 0.5% of the portfolio. This position already reached 50% ROI in the past, a few hours after I entered it. I was a greedy bastard back-then and wanted a 100% return. Well, not anymore. Happy with a $200 gain here this week. The position is showing some little gains now after this week's rebound.

Feb/Apr SPY 183/200 Victory Spread
Another small bullish bet, although in this case it can also make money to the downside. Happy to take $200 profit here.

April29 SPX 1450/1475 Credit Put Spread
Total credit of $1,440. Looking like Marilyn Monroe in her prime (and her prime was her whole life). Only 4 deltas and I'm planning to exit at 2 deltas or so.

Action Plan for the Week

- 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.

- If the market rallies, I want to sell a May31 SPX Call spread. Hopefully the 2150/2175 spread for 2.25 credit or better. This will complete an Iron Condor position with the existing May31 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 the two Credit Put Spreads we have on are below 1500. No rush for buying insurance at the moment.

We were in a good position last weekend and now that we don't have triple downside exposure we are much better. Clearly, a market rally would help a little more. Not for our Credit Put spreads, which are very far and safe, but for cheap portfolio insurance purchase and possibly adding conservative Credit Call spreads. If we don't get a continuation of the recent rally and the markets move sideways or down, then we won't do anything and it won't be the end of the world. We're very unlikely to be hurt at this point with the current positions we have in play.

Economic Calendar
Sunday: China's Manufacturing and Non-Manufacturing PMI
Monday: Europe's PMI. US PMI
Tuesday: Germany's Unemployment, Europe's Unemployment.
Wednesday: US ADP Unemployment change. ISM Non-Manufacturing PMI. Crude Oil Inventories
Friday: US Non-Farm Payrolls, Unemployment Rate

With closed positions and trading costs included, we are down 2.92% for 2016 while the market is down 5.07%. The portfolio is currently 40% at risk, 60% in cash

Stay tuned. I will publish the first Options Trading Monthly Digest article of 2016 this Tuesday or Wednesday.

Take it easy. But take it anyways.

Note to LTOptions members: The documentation update has been published this morning and it is now available on the site.

Check out 2016 Track Record

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