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Saturday, January 9, 2016

Weekend Portfolio Analysis (January 9, 2016)

In the previous Weekend Portfolio Analysis, I mentioned that my January 1865/1875/2200/2210 Iron Condor was safe and would be a winner. Boy, what a difference one week makes! With the crap-storm endured the first week of the year (the worst in the history of the markets), the 1875 short Put of the Iron Condor reached 20 deltas several times, looking not so safe at all.

I think we have suffered enough, and we very well deserve a few seconds of relaxation now: I always say: We're living truly wonderful days.
Female readers, you too feel the joy and happiness with that view.

Good morning all, and welcome new readers. This is the typical weekend article, where we go over the portfolio and lay out a plan for the upcoming week, plus the occasional sexual innuendo to keep you awake, as "finances" is a too boring subject.

Market Conditions
I'm going to show you the chart of an enigmatic instrument, which, in 2015, corrected more than 25% in just 2 months. You guess which symbol I'm talking about:
Think about it. See if it rings the bell.
Nothing yet?

The above chart depicts the infamous trajectory of FXI (Chinese large Caps ETF) from late April to early July of 2015. A drastic 25% correction in two months and,...and....nobody cared about it. The US markets didn't care about this 25% correction in the Chinese market just a few months ago. However, at the moment, China is all that matters. Go figure. Panic has taken over this market folks, and things stop making sense when this happens.

Here's the SPX
(Click on image to enlarge)
Stochastics: 5 (oversold)
McClellan: -205 (oversold)
Stocks above their 20 Day Moving Average: 13% (oversold)

Clearly a pessimistic extreme. It always, always brings fear. But, with fear comes exaggeration. The market is pricing a 10.47% probability of expiring in the money for the Feb SPX 1660 Puts. A 10.17% probability for the March 1570 Puts. Those are huge numbers. Even with all the fear there is right now, I would sell Puts down there if I didn't have downside exposure already. Absolutely. If those positions were to fail, the market would be in a crash type situation with most investors suffering 20% - 30% account draw-downs. The credit Put seller, on the other hand, yes, he would suffer losses but way way smaller provided he defends early, or hedges properly.

Support in the 1870 area, and then the October 2014 lows around 1820. Although, during true panic environments, all notions of technical and fundamental analysis can be thrown out the window.

Taking a look at RUT, where I have no position, we're close to the last support barrier around 1040. All hell breaks loose after that:
(Click on image to enlarge)

If the market keeps going down, not in panic mode but in orderly fashion, then I'm looking at the possibility of a new potential downside channel where we may find support. I've drawn a yellow diagonal line to complete the downwards channel:
This yellow line could provide support. Again, unless we see total panic and capitulation with a more vertical move.

Current Portfolio

January SPX 1865/1875/2200/2210 unbalanced Iron Condor
$2,300 credit. 1 week to expiration. Concerned about that 27% probability of expiring in the money for the 1875 Put. My main worry is a massive sell-off in Asia to start the week, as the Asian markets open way before the American ones. It could go beyond 30% probability 35, 40, who knows, with us on this side of the ocean waiting for the markets to open and unable to defend anything. That's why I finished the week buying SPY Puts, 187 strike price. This will mitigate any potential catastrophe. If not, well, it means just less profits due to the cost of the insurance. I'm fine with that.

March IWM 112/112/120 Synthetic Stock Hedged
Speculative bullish bet. 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. Showing nice gains of +78% Return on Investment but I won't cash them. This position is there to protect the longer dated Credit Put spreads against a severe sell-off in the upcoming days.

April29 SPX 1700/1725 Credit Put Spread
$1,440 credit. Showing some losses on the Put side and 22 deltas on that 1725 strike price. Not terrible, yet. This spread is somewhat hedged by the long Puts discussed earlier. 

March SPX 1650/1675 Credit Put Spread
$1,225 credit. 14 deltas on that 1675 strike. Not my biggest concern. The market has to fall a lot for this one to be in trouble.

January SPY 187 long Puts
Anti-crash protection. 6 contracts, total debit $450. Already showing 41% gains, but  I won't take this position off. Either it will go to expiration worthless, or I cash in the gains if the Put side of the Jan SPX Iron Condor needs to be closed for a loss this week.

Action Plan for the Week
- Defend the January SPX 1865/1875/2200/2210 unbalanced Iron Condor in the event the 1875 Put reaches 30% probability. I would take a loss and deploy a new Credit Put spread, most likely using May options in the low 1400's. In this scenario I would take gains off the market with the January SPY 187 long Puts

- If the market keeps falling harder, to around SPX 1865, the April29 SPX 1700/1725 Credit Put Spread will be defended. I will take a loss and deploy a new position in the high 1400's. Still using Apr29 options. In this case, I would cash in the gains from the March 159 long Puts to mitigate the loss. After the adjustments are deployed I will strongly consider a bullish speculative play. Long term. A May position or something like that. It would be a small bet with 0.5% of the portfolio. It can be as simple as a long out of the money Call on SPY or IWM.

- Sideways action, which I doubt, I will do nothing at all.

- Upside moves, also nothing at all.

Going back to the severe sell-off scenario, as you can see I would take losses. However, those hypothetical losses would be partially offset by long Puts in play. Then the new positions with the adjustments would be down in very safe areas where I believe they shouldn't have problems to be winners. These adjustments would also help offset the losses. Between adjustments and Long Puts, the portfolio will not suffer drastic losses overall. In this apocalyptic scenario, with new positions deployed in the 1400's, I would not deploy long Put hedges as I would be overpaying for a very, very low probability scenario.

I think, the chances of sideways price action this week are low. The market is way too emotional at the moment. Either a strong rebound, or more capitulation.  That image of Scarlett though. It will accompany me, and keep me warm....

Economic Calendar
Tuesday: China's Trade Balance. Exports and Imports.
Wednesday: US Crude Oil Inventories. Federal Budget Balance
Friday: US Core Retail and Retail Sales. PPI. Industrial Production.

We are up +1.94% for 2016. The portfolio is currently 53% invested, 47% in cash.
Good luck this week folks!


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