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Sunday, November 6, 2016

Weekend Portfolio Analysis (November 6, 2016)

The next weekend analysis will come to you after we have elected a new president (Or I should say 'you have elected a new president'). At least that's what I hope, but there's always a chance we pull a 2000 again and stay in limbo for indefinite time. That's what the markets would hate.

This election environment feels so much like 'Last Call' at a nightclub, where in a last desperate attempt to get lucky, you quickly scan the remaining drunk talent on the dancing floor but you don't get to spot a single seven. And it's like, really?? is that all we have left? Can we....? can we push the reset button somewhere and start all over?

Whoever ends up getting elected, will cause enormous, perhaps unprecedented, frustration on the other side of the population for at least 4 sweet years. Yep. Democracy hurts. It would be way cooler to always get it your way. But, since many of you come here for consolation, let me provide you with a bit: Neither candidate would have unilateral power to do as he/she pleases indefinitely, a la Castro. I lived the worst of all for 26 years! And that's great! because now, I know it can never get any worse than that! It's always better.

But this is not LT's Politics?!!? This is not a site to discuss the corrupt and rigged political system of nations!?!?! This is a site where we discuss a different corrupted and rigged system. So, let's get to it, shall we?


Recent Trading Activity

- Initiated a November RUT 1080/1070 Credit Put spread on Wednesday


Market Conditions 
(Click on image to enlarge)
Stochastics: 4.6 (oversold)
McClellan: -180 (oversold)
Stocks above their 20 DMA: 24% (oversold)

A short-term pessimistic extreme.

As scary as it always looks, this is the type of environment where the Option trader should thrive. This is where the school of fish (buy and hope crowd) doesn't know what to do anymore, as they are a one trick pony, and they see the world is not precisely liking their one trick at the moment. All the little kids confused, questioning their existential purpose (the absurdity of passively following an index that goes nowhere for two years) and then the Shark comes in the middle of the turbulence. We've been preparing for the elections for more than two months. Liquidating inventory; opportunistically establishing rather safe and small income positions. The only regret I have is not having purchased those long Puts I mentioned a while ago, pointing out that the VIX was only bound to go up. If not via a price decline, at least via fear expansion, those long Puts should be a decent investment, just cashing out the day before the elections. I was greedy though, and as you know, I wanted to purchase those long Puts with a VIX reading below 12, which never happened. So, I missed the opportunity.

But let us focus on the 'now'.
You can now sell December RUT Credit Put spreads in the 1020-1010 neighborhood for 0.60 credit. That's more than 12% - 13% below current levels and 19%-20% below the September highs. Of course, the market can keep declining down to that point (though I highly doubt it), but if fecal matter truly hits the fan, perhaps there are more important things to worry in your surroundings than the market going down 20%.

In any case, you can play it smaller than you usually do, so that if you need to adjust the position, you can easily recover from the loss and even make some gain by deploying capital at new levels not seen since before sex was invented. And in the meantime, the rest of the world is down money. Considerably may I add.

Here's the Russell index.
(Click on image to enlarge)
I've drawn some minor horizontal support at 1130, and then a perhaps stronger one at 1085.


Current Portfolio

DEC SPX 1860/1870 Credit Put spread
$1,300 credit. 6 weeks to expiration. Now at 11 deltas. Raise your hand if you are concerned about this one. That's what I thought. No concerns.


NOV RUT 1080/1070 Credit Put spread
$650 credit. 2 weeks to expiration. 13 deltas. It may need adjustment on a dip below RUT 1,120. That's about 4% below current price. Although it is something that may definitely happen, the fact that I played it small to begin with, allows me to double down on a hypothetical adjustment way below and recover the entire loss. So, I am sleeping like a lazy sloth.


Action Plan for the Week

- Defend the NOV RUT 1080/1070 Credit Put spread if RUT falls about 4%. Deploy the adjustment using December options in the mid 900's strike prices.

- If we keep going down (1% - 2%) I will consider some sort of bullish exposure. Simply long Calls wouldn't get the girls wet. So, I'm thinking perhaps a synthetic stock hedged position. Something like Long IWM 113 Call + Short IWM 113 Put + Long IWM 121 Put. I'd be using January or February options to give myself decent time to capitalize on a decent rebound.

Now, we also better start thinking about a post-election universe.
With uncertainty removed, and an overly pessimistic environment already, chances are we won't go down as much as the world seems to think if the yellow haired guy wins. No Call selling though. At least not until we move back above the 50 day average. Otherwise it is usually a stupid proposition.

 At the same time, with the most important Fed meeting of the year scheduled for next month, the rate hike uncertainty may keep this market from staging its usual orgy after the initial post-election euphoria. So, yes, I will be willing to sell Calls, only when the market moves back above its 50-day and as part of Unbalanced Iron Condors.  I'd be using December30 options for this purpose, not the usual monthlies.

It is hard to predict which offensive move I will make this week, because it will heavily depend on where the market goes. If it stays sideways and election day happens to be a non-event, at least my two Credit Put spread positions will make money when that VIX collapses. But I would be hesitant to initiate a new position in that scenario as I would just be adding risk in the same neighborhood to the down-side, whereas the upside would be dangerous while we are in this short term oversold condition.



Economic Calendar

Tuesday: China's CPI & PPI. US Election Day.
Wednesday: US Crude Oil Inventories, a couple of Fed members speak
Thursday: Another Fed member speaks
Friday: Another Fed member speaks (don't they get tired of speaking while trying to say nothing?). Michigan Consumer Sentiment and Expectations.


Options Trading results: +7.38% for the year (S&P benchmark: +2.02%)
                                         Portfolio 26% invested, 74% cash.

Take it easy, but take it anyways.
LT

PS: November 8 also happens to be my birthday. Politics has its funny ways and Allah works in mysterious ways. I will be digesting happy birthday wishes form all over the world and family time will keep me busy. Back full force on Wednesday.

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.

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