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Saturday, March 19, 2016

Weekend Portfolio Analysis (March 19, 2016)

Ok folks, we are finally past FOMC and triple witching, and we have also seen yet another historical rally. The market has been really moody in the last 7 months, with 4 wild swings (2 up and 2 down) of more than 10% each. These sustained moves are what typically hurts the Credit/Iron Condor trader the most. I haven't run the numbers, but 4 swings of this magnitude in both directions, in just 7 months, must not be too common at all. But well, the market does its thing, surprises everyone, and it is now up 0.28% for the year.

Market Conditions
(Click on image to enlarge) 
Stochastics: 93 (overbought) 
McClellan: +186 (overbought)
Stocks above their 20 DMA: 79% (overbought)

Short-term overbought extreme.
Ok, this rally is reaching historical proportions. It's time to dedicate more time to it. 

These are the statistics for the past three weekends of Portfolio Analysis:

SPX PriceStocks Above 20 DMA McClellan Oscillator
March 51999.9989% +323
March 132022.1984% +225
March 192049.5879% +186

Tell me you are seeing the pattern.
You don't see it yet?
Ok try harder....

These are the first signs. It's like when one or two fish start changing direction, then a few more, until eventually the entire school of fish turns all of a sudden. We have a market going up, and less participation than in previous sessions.

The issue with short term overbought extreme conditions, is that they can persist for a long time....
Unlike short term oversold extremes which are bought more aggressively as there is much more money on the sidelines willing to buy (or legally allowed to only buy, i.e. "mutual funds"). So, overbought conditions must be treated much more carefully than oversold ones, as they persist for longer. A point I have made several times in the past. I have enumerated about seven reasons, one of them today (the legality of short-selling for numerous pools of money), the other five or six are scattered over hundreds of past articles. If you've been reading for a while you are saved. Otherwise, good luck digging up.

The VIX is at 14, making the business of selling sugary pan-cakes from an improvised kiosk in Calle 8, Miami, look like a succulent, desirable venture when compared to Options selling at the moment. Good for purchasing portfolio insurance though.

But let's compare this rally to recent similar ones that amazed the Human Kind in their time:

October 15 to November 28, 2014 - SPX from 1,820 to 2,075. That's +14% in 44 days.

September 29 to November 3, 2015 - SPX from 1,871 to 2,116. That's +13% in 35 days.

The current one - from February 11 to March 18 - SPX from 1,810 to 2,049. That's 13.2% in 36 days.

Of course the current rally is not over. But, common sense dictates caution for the bulls. At some point the market needs to calm down. Recency bias is a bitch and sentiment reflects there is no fear. People start to think the market will keep going up, just because it has done so, relentlessly in the last five weeks. But nothing is ever a norm in the markets. Remember early in the year when pundits were saying things like "volatility is here to stay", "VIX above 20 is the new normal"? Likewise, the market just can't keep going up 10% every month indefinitely. We would see the S&P500 above 4,500 before the end of the year and this overly sexual blog would disappear.

Current Portfolio

May31 SPX 2125/2150 Credit Call Spread
22 deltas. Adjustment point is now around 2,070. If it happens, I will take a loss and deploy a 2185/2195 position with typical full size.

June30 SPX 1500/1525/2150/2175 Unbalanced Iron Condor
3 deltas on the Put side at the moment and 21 on the Calls. Adjustment point for the week estimated at around 2,080. I believe we won't see this number, but if we do, I will deploy a new 2225/2250 using full size.

July29 SPX 1650/1657/2200/2225 Unbalanced Iron Condor
48-hour old position. Lots of baby-sitting ahead. Nothing to do here.

July SPY Long 169 Puts
Portfolio Insurance

Action Plan for the Week

- Adjust May and June unbalanced Iron Condors if SPX reaches 2,070 and 2,080 respectively.

- Close the Put side of the June Iron Condor for 0.40 debit or better given the opportunity. Current price is 0.50, so we are getting close.

- If the market declines, consider closing the Call side of the May Iron Condor for break-even.

- No new positions unless we see a severe 4 or 5% decline.

Economic Calendar
Monday: Existing Home Sales
Tuesday: Europe Manufacturing and Services PMI's. German climate index
Wednesday: US New Home Sales, Crude Oil Inventories
Friday: US GDP

Options Trading results - With closed positions and trading costs included, we are down 1.60% for 2016 while the market is up 0.28%. The portfolio is currently 47% invested, 53% in cash.

Forex Trading results - Up +2.68% for the year. Got stopped out on the last long Gold play.

Take it easy, but take it anyways!

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

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