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Saturday, September 30, 2017

Weekend Portfolio Analysis (September 30, 2017)

This week's analysis has been published at

Download Weekend Portfolio Analysis (2017-09-30).pdf

If the above link doesn't work for you, simply log in to, navigate to the "Weekly Analysis" tab and download the document from there.

The Weekend Portfolio Analysis will be available on this site next week for historical reference.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

Last Weekend Analysis now publicly available: Weekend Portfolio Analysis (September 23, 2017) 
Recent Trading Activity

- Closed Call side of October RUT/IWM Unbalanced Elephant on Monday at a $400 loss. The Put side is still in play and should yield maximum profit, turning this Elephant into a small winner in the end.

Market Conditions
(Click on image to enlarge)
Stochastics: 90 (Overbought. Up from 72 last week)
McClellan: +83 (Neutral. Up from +71 last week)
Stocks above their 20 DMA: 72% (Overbought. Up from 69% last week)

No man's land

The market keeps going up and yet doesn't reach an overbought condition (at least by my definition). The same pattern we have seen in the recent past and which I mentioned I feared a couple of weeks ago.

September is gone. The historically weakest month of the year, and it only brought new all-time highs across the board. A tax cut deal is far from being reached, but apparently that's the main focus for market participants now and pundits argue that small caps would see the greater benefits.

Without seeing a true overbought extreme, it is hard to try and forecast any kind of weakness. Now, RUT is a different story. With this week's move, at least some sort of sideways action should be in the cards:

(Click on image to enlarge)
Brutal move this week for those with Call spreads on. I am so glad to be trading Elephants as a direct result of the lessons learned in recent years. We took a manageable loss on the Call side. Didn't deploy a new Credit Call spread, and the Put side is now safer and will eventually bring a greater gain than the loss suffered this week. The October Elephant will therefore end up a net winner despite everything and that is a great sensation. Having a winning position, making money even when price went so against you.

At this point the price of the Russell is 5.4% higher than its 50-day average. Although not a record, it is very unusual. So, for new positions in the Russell, I will be less concerned about the Call side.

Current Portfolio

OCT SPX 2250/2260 Credit Put spread
Remainder of what used to be an Unbalanced Iron Condor.
Net Credit of $1,100 and three weeks to expiration. With the Call side gone, I have no more concerns with this position and will ride it all the way to expiration.
(Click on image to enlarge)
Defense line: 2,315 to the downside.

OCT RUT 1270/1280 Credit Put spread
IWM 130 Long Puts
Net Credit of $952, three weeks to expiration. This is the remainder of what used to be an Unbalanced Elephant. The Call side is now gone and I have no more concerns here. Will ride to expiration.
(Click on image to enlarge)
Defense line: 1,315 (adjust Put side).

NOV SPX 2315/2325/2575/2585 Unbalanced Iron Condor
Net Credit of $1,500. Seven weeks to expiration.
(Click on image to enlarge)
Defense lines: 2,395 (adjust Put side) and 2570 (adjust Call side). Once again, thanks to the 4:1 ratio of Puts to Calls we can afford to wait until roughly 45 deltas on the Call side before making an adjustment.

Action Plan for the Week

- I'm still willing to re-establish the Call side on the October SPX position. I'd gladly sell 2570/2580 for a 0.90 to 1.00 credit keeping a 4:1 ratio to form the Unbalanced Iron Condor (so, 5 Credit Calls spreads given that I have 20 on the Put side). After this upcoming week, we will be too close to expiration and I will not be interested in adding the Call side anymore.

- Likewise, I am willing to add a Call side to the October RUT Position. Remember this was an Elephant whose Call side was taken off for a loss. Well, given the recent RUT price action, I am willing to sell something like the 1550/1560 Credit Call spread for 0.90 credit or better. RUT needs to move a little higher for this credit to be possible and I would be deploying only 5 spreads (keeping a 4:1 ratio in respect with the number of contracts on the existing Put side).

- Of the above two ideas, I am only willing to apply one of them. In other words, if the market keeps rallying this week and the above Credits are possible for the described Credit Call spreads, I will only deploy one of them (RUT more likely) and never both.

- Take the Call side of the November Unbalanced Iron Condor off the table at 50% of its max gain potential on a market decline. This is a remote possibility but just throwing it out there. Adjust the same Call side if SPX hits 2,570. Also unlikely for the upcoming week.

- Finally, this week the second November position will be deployed. Typically I deploy it late in the week, but my schedule will be complicated on Thursday/Friday so I may be entering this one any time from Monday to Wednesday. Also, the typical go to strategy is an Elephant for the second income position of the month. However, I have already mentioned my diminished concerns over  a potential RUT Credit Call spread. The Elephant is more ideal for cases where the price of the index is closer to its 50-day avg, where a rally can kill the typical Iron Condor. But in this case, RUT is so much higher already than its 50-day that I'm less afraid. Playing the Elephant is safer obviously, but you obtain overall less credit. Going with an Unbalanced Iron Condor is a little riskier (because of potential losses on the Call side, that the Elephant is able to mitigate) but at the same time it offers more credit. Playing it in a 4:1 ratio will also allow me to delay the adjustment. So here's the idea:

20 NOV 1370/1380 Credit Put spreads @0.65 (credit: $1,300)
  5 NOV 1570/1580 Credit Call spreads @0.90 (credit: $450)
Total credit: $1750 and the adjustment point on the Call side would be RUT 1,565.
Because the VIX is at record lows, adding a couple of long IWM 148 strike Puts as a volatility hedge is not a bad idea. The final credit would be $1,590 in this case:

The other alternative, the Unbalanced Elephant:
20 NOV 1370/1380 Credit Put spreads @0.65 (credit: $1,300)
  9 NOV 1570/1580 Credit Call spreads @0.90 (credit: $810)
  2 NOV 140 IWM Long Puts @0.80 (debit: $160)
18 NOV 158 IWM Long Calls @0.23(debit: $414)
Total credit: $1,536 and the adjustment point at RUT 1,535 at the beginning (slowly moving up as time goes by)

A little bit more credit for the Iron Condor and also a higher defense point on the Call side. So, I like that. Also if RUT were to fall, the Call side would be a little richer on the Iron Condor, plus less money spent in commissions. The advantage of the Elephant in this situation is, that if RUT rallies really hard, let;s say 1,565 the Call side would have been taken off at a small loss a while ago in the Elephant and never been a concern anymore. The Iron Condor on the other hand would require the typical adjustment higher up and the consequent additional dedication/stress etc. I'm going to go with the Unbalanced Iron Condor, because even in the event of a Call side adjustment, the new Credit Spread would be way above 1,600 and to me that is an impossible number for RUT in 6 weeks.

Economic Calendar
Monday: German and Europe Manufacturing PMI. US ISM Manufacturing PMI.
Wednesday: ADP Non-Farm Employment change. ISM Non-Manufacturing PMI. Crude Oil Inventories.
Thursday: ECB Publishes Account of Monetary Policy Meeting.
Friday: Non-Farm Payrolls. Unemployment Rate.

Trade with confidence my friends.

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