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Sunday, September 4, 2016

Weekend Portfolio Analysis (September 4, 2016)

Writing to you today from the city of Naples, Florida.
And let me tell you folks, there is absolutely nothing to do in Naples! Except, perhaps, writing up articles for Moooving on!

Recent Trading Activity

- No Trades

Market Conditions 

Market up 0.45% this week and now +6.66% for the year. Price action on the SPX index still inside the wedge outlined last week.

(Click on image to enlarge)
Stochastics: 48 (neutral)
McClellan: -4 (neutral)
Stocks above their 20 DMA: 61% (neutral)

No man's land. Plenty of room either way.
We're finally past August. One of the traditionally weakest months of the year became one of the most boring ones ever. Good for an options seller that already has a few positions on. Not so good if you want to initiate new ones.

VIX below 12 at the moment, making me wonder why on Earth I decided to write about options trading six years ago. With such low VIX values, I think being long some premium, both Calls and Puts is not a bad idea, reason why The Lazy Elephant position was born and will be used for the second time in a few hours.

Current Portfolio

SEP SPX 1825/1800 Debit Put Spread + 1625/1600 Credit Put Spread
Portfolio Insurance

OCT SPX 1825/1800 Debit Put Spread + 1625/1600 Credit Put Spread
Portfolio Insurance

September SPX 1970/1980 Credit Put Spread 
$1,200 credit. Looking great. No Concerns.

October RUT 1100/1110/1320/1330 Unbalanced Iron Condor
$2,200 credit. 7 weeks to expiration. 79% probability of success now. 11 deltas on the Call side and 8 deltas on the Put side. No concerns at the moment.

Action Plan for the Week

- Apparently no defensive moves will be necessary on existing positions as they are looking comfortable and far from danger.

- As mentioned last week, I will touch the subject of an SPX October Lazy Elephant today.

The idea at the moment is an October SPX 10/10/10/12 Lazy Elephant, using strike prices 2000/2010/2255/2265:

(Click on image to enlarge)

So, we added two additional 2265 Long Calls to better hedge upside risk.
Given the impotent VIX, we can also add a downside hedge by buying one SPY 206 Put contract. $112 bucks that will eat into the Elephant credit, but flatten out the risk curve to the downside.

(Click on image to enlarge)
Subtle but important difference.

One of the main challenges here is entering the entire position. There are many pieces and may result, for some, in the need to enter it in three separate steps:

- Step one: 10/10/10/10 October  SPX 2000/2010/2255/2265 Iron Condor

- Step two: 2 additional Long 2265 Calls

- Step three: 1 Long SPY 206 Put

That all looks good and nice in theory, but in reality most brokers charge a basic order ticket fee per order filled in addition and regardless of number of contracts traded. Commissions costs can quickly sky-rocket, specially if the basic order ticket charge is around 10 bucks. That's too great of an impact.

One alternative that can be used is to substitute the additional 2265 Calls with SPY options. Instead of 2 of the 2265 SPX Calls, you can buy 20 SPY 226 or 227 strike Calls. Because you trade more SPY Contracts you will spend more in commissions there, however you will save in other areas. First, you save one order ticket charge because now you can enter the Elephant in just two steps:

- Step one: 10/10/10/10 October  SPX 2000/2010/2255/2265 Iron Condor

- Step two: Buy 1/20 October SPY 206/226 Strangle

Second, even with the greater number of contracts, you may save money since with SPY you have a thin Bid-Ask spread, whereas when trying to purchase 2 long SPX 2265 Call options, being a single legged order in a less liquid instrument, you are very unlikely to obtain mid-price between Bid and Ask, which is a big spread in this case.

20 SPY 226 Call options can be purchased for 0.22 debit each ($440 total debit) and that's the Ask. As for SPX, the 2265 Calls (Bid: 2.00, Ask: 2.45) can probably be bought at 2.30, or 2.40, which in the end means a $460 or $480 investment, since you are very unlikely to get filled at 2.20 on these Calls. Summing up, buying the SPY strangle, can save you one order ticket charge, as you put on the elephant in two steps instead of three, and at the same time, it can save you more money given the thin Bid-Ask and greater liquidity, even though you have to use more contracts.

The position will probably be initiated on Tuesday (markets closed on Monday), and as usual, strike prices may slightly change from today.

Economic Calendar

Monday: Markets closed for Labor Day
Tuesday: US PMI
Thursday: Crude Oil Inventories. ECB President Draghi speaks

Options Trading results: Up +3.21% YTD vs S&P up +6.66%. Portfolio 45% invested, 55% cash.

You know how they say: 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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