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Sunday, February 19, 2017

Weekend Portfolio Analysis (February 19, 2017)

This week's analysis has been published at

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The Weekend Portfolio Analysis will be available on this site next week for historical reference.

All currently open positions can be seen on the Track Record page

Related Article: Weekend Portfolio Analysis (February 11, 2017) 
Recent Trading Activity

- Adjusted Call side of MAR SPX 2090/2100/2360/2370 Unbalanced Iron Condor to 2400/2410 on Monday at a $1,900 loss. New credit received of $1,125. Put side now almost a sure winner ($1,200 credit)

Market Conditions

This is how I was drawing the uptrend channel before:
(Click on image to enlarge)
I thought gains would have been hard fought and the S&P just went above that upper end of the channel with ease triggering the adjustment of the SPX Iron Condor.  Now we need a new visual guideline, so I deleted that old channel and drew a new one to better "match" with the current situation:

(Click on image to enlarge)
Stochastics: 97 (overbought)
McClellan: +8 (neutral, down from +80 last week)
Stocks above their 20 DMA: 66% (neutral, same as last week)

No man's land again.
Even though the market went higher, it is interesting to note the percentage of stocks above their 20 DMA  stayed the same and the value of the McClellan Oscillator decreased. The index is now 3.16% above its 50 Day average, which although not extreme, certainly getting close to it.

(Click on image to enlarge)
RUT hit resistance this week to the penny. Unlike the SPX lines, which I re-drew, these haven't been touched at all. Even if RUT penetrates resistance, it is the least of my concerns as the Unbalanced Elephant position would end up being an overall winner even closing the Call side for a loss.

Current Portfolio

MAR SPX 2090/2100/2400/2410 Unbalanced Iron Condor hedged with SPY 214 Put
$2,199 net credit (when subtracting the debit invested in the SPY Put). 4 weeks to expiration. 3 deltas on the Put side and 17 deltas on the Call side:

(Click on image to enlarge)
The market kept rallying after the 2400/2410 Credit Call spread was deployed as an adjustment and obviously 17 deltas is not too comfortable, especially when it comes to the Call side. The annoyance made me go back to thinking about this theoretical exercise I did in December where the Call spreads would just be taken off at a loss and no adjustment ever made. When you think about it, it is not a terrible outcome: taking a $1900 loss on the Call spread, which would be mitigated by the now almost sure $1,200 win from the Put side. So roughly a $700 loss overall in the Unbalanced IC when all was said and done. But now we have Unbalanced Lazy Elephants in the game too, which are much more resilient during market rallies. The Unbalanced IC loss of $700, combined with an Unbalance Lazy Elephant win of roughly +$1,400 (if the market rally stopped) or roughly +$500 if the market keeps rallying indefinitely, in the end results in a slightly positive month or almost flat. We would effectively be dealing with this low volatility rallies (the worst scenario for options sellers) with slightly positive to flat months and not much stress about Call side adjustments.

I also went back to the Options Trading Reflections for 2016 piece, because last year was unmerciful for Iron Condor traders. Out of the 12 Iron Condors traded, 5 needed Call side adjustments. Way more than what probabilities would have suggested. One of the conclusions made was that, in the end, making the adjustments was overall a better strategy than taking a loss and not deploying new capital at new strikes, as most adjustments were successful and avoided losses. Doesn't mean that will always be the case of course, but that's how things went last year. Now, not defending at all, and letting price penetrate the short strike prices would have been devastating. Yes many times prices come back, but when they don't you suffer a loss that takes many winners to recover from.

One reader this week asked about whether bringing the untested closer to collect more credit, and forgetting about the threatened side was a better strategy. I am not against bringing the untested side closer especially during market rallies, as euphoria usually takes longer to be reverted than pessimism. During down moves however, I'm not really in favor of bringing the Call side down to obtain new credit, as the historical upside bias of the markets makes it too easy for that new position to end up a loser. Now, back to the reader's question. I remember tastytrade did a study in late 2011 or 2012 (I don't remember the exact date) when Al Sherbin was still the head of the research team, where they compared the different approaches. Rolling the tested side resulted in a smaller winning percentage but overall more "dollar gains" over the long run. Rolling the untested end meant a higher winning percentage but smaller dollar gains in the long run due to the nature of the infrequent but big losses incurred. For whatever reason, they removed those old episodes from the archives. I have always been in favor of the "dollar gains" and consider the winning rate a meaningless statistic.

MAR RUT/IWM 1235/1245/1450/1460/127/146 Unbalanced Elephant
$1,480 net credit. 4 weeks to expiration. Not really concerned here.

(Click on image to enlarge)

Defense lines at 1290 (Put spread adjustment) and 1420 (take Call side off at a small loss and just ride the Put side to compensate for it and end up with a winner overall in the end). If the market keeps rallying past 1,420 we'll still have a winner, this is precisely what Unbalanced Lazy Elephants were built for.

Action Plan for the Week

- Let's analyze the 2090/2100/2400/2410 SPX position.

We can:

1. Wait until SPX 2,375 to defend the Call side. The SPX index would be more than 4.5% above its 50-day average and that would be extreme. I'm inclined to think we won't see that 2,375 print, but realistically speaking this market has been doing the unthinkable over and over again. By waiting, we give ourselves a chance for the market to retrace and make good money out of this 2400/2410 Bear Call spread.

2. The second option is more defensive in nature, and it is to use this alternative for defending Credit Call spreads, through which we would be buying additional Call options right now to flatten-out the T-zero line. It can be either SPX 2410 Calls, or 2400 or even using equivalent SPY strike prices of 241 or 240. This would allow us to give up the credit obtained from the 2400/2410 Credit Call spread (or most of it) in exchange for a chance to delay the adjustment into the mid-high SPX 2,380's without incurring greater losses than what we would have faced by adjusting at SPX 2,375 without the purchase of upside edges (alternative 1)

Both techniques have an advantage an a disadvantage. Option one keeps the possibility of making good money out of the 2400/2410, but implies an adjustment at an earlier point (2,375) if things go wrong. Option two allows us to delay the adjustment to around SPX 2,385, decreasing the probability of taking another loss, but potential gains from our 2400/2410 Call spread are drastically reduced, as most of that credit obtained will be invested as a debit in the long call hedges. Option 1 allows the trader to exit the 2400/2410 at break even with a mere 15-point decline in SPX. Option 2 practically forces us to stay in the position almost until expiration. I am going to go with Option number 2, but this is a very personal decision for each trader according to his bias and risk tolerance. It is still early in the year, and there is time to recover from this. If the position was played as "unbalanced" from the beginning, it is far from being a disaster.

- Defend the March RUT Unbalanced Elephant position in case the index reaches 1,420 by just closing the Call side at a small loss. This would result in a winner overall come March expiration thanks to the gains from the Put side. Nothing to do if RUT stays below 1420.

- Enter an April SPX Unbalanced Iron Condor on Friday as we will be 8 weeks away from regular Apr expiration. As usual, I will go with around 10 deltas on each end, and Unbalanced. I may use a 2/3 or 3/4 ratio of Calls to Puts instead of 1/2 given how extended I feel current SPX price is above its main moving averages. My current candidate is 2160/2170/2450/2460. As usual those strike prices may change depending of market price action during the week.

Economic Calendar

Monday: US Markets closed for President's Day
Tuesday: A couple of Fed members speak 
Wednesday: Europe CPI. US Existing Home Sales and FOMC meeting.
Thursday: US Crude Oil Inventories
Friday: New Home Sales. Michigan Consumer Sentiment

Good luck this week my friends,

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