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Sunday, October 8, 2017

Weekend Portfolio Analysis (October 8, 2017)

This week's analysis has been published at

Download Weekend Portfolio Analysis (2017-10-8).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The Weekend Portfolio Analysis will be available on this site next week for historical reference.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 30, 2017) 
Recent Trading Activity

- Initiated a November RUT Unbalanced Iron Condor position on Tuesday for a net credit of $1,555. As explained in the previous weekend analysis, under the current circumstances, the Unbalanced IC seemed more advantageous than the typical Elephant I usually deploy as the second income position of a month.

- Initiated a small November SPX 2425/2420 Credit Put spread on Thursday. New credit collected of $250. The idea is to mitigate potential losses on the Call side of the November SPX Unbalanced Iron Condor.

Last week I also mentioned the possibility of adding either an October RUT or SPX Credit Call spread to complete Unbalanced Iron Condor with existing October Put spreads but the credits were terrible and not at all attractive. The markets did not reach an overbought extreme either, which decreased my confidence in deploying such spreads.

Market Conditions
(Click on image to enlarge)
Stochastics: 96 (Overbought. Up from 90 last week)
McClellan: +11 (Neutral. Down from +83 last week)
Stocks above their 20 DMA: 75% (Overbought. Up from 72% last week)

No man's land. 
The tonic this year, with very few price extremes. In fact I remember only one.

The McClellan oscillator is signaling a bearish divergence: making lower highs despite market price making higher highs. This is conflicting with the fact that a greater % of stocks is now above its 20-Day average.

The SPX index itself is 2.8% higher than its own 50-Day average. Although not an extreme, it is approaching the 3.5% mark, which has been a point of rest in recent years. A 3.5% higher than the current 50-day average Puts the index around 2,567. Dangerous for the existing November 2575/2580 Credit Call spread (part of Unbalanced Iron Condor). Of course, over time the 50-day average can slowly move up too and there is still some room before hitting resistance in the upper end of the long-term trend channel. The verticality of this move has been incredible, and yet, we're not at a price extreme (at least the way I define it).

And here's the Russell:
(Click on image to enlarge)
Price seems to have gone too far above its average, which will now need to catch up. I left the uptrend red line on the chart as it may be our guideline for future support.

Current Portfolio

OCT SPX 2250/2260 Credit Put spread
No concerns. Very far out of the money. Will be ridden all the way to expiration.

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.
No concerns. Very far out of the money. Will be ridden all the way to expiration.

NOV SPX 2315/2325/2575/2585 Unbalanced Iron Condor
Net Credit of $1,500. Six weeks to expiration.
This is the one concerning position at the moment and this week will be decisive.
(Click on image to enlarge)
Defense lines: 2,390 (adjust Put side) and 2570 (adjust Call side). Thanks to the 4:1 ratio of Puts to Calls we can afford to delay the adjustment. For example, if the adjustment is made when SPX hits 2,570, the Call spreads will be worth roughly 5.00. If you subtract the original 1.00 credit received for them, it is a net 4.00 loss per spread or $2,000 in 5 spreads. Now, had I played a 2:1 ratio of Puts to Calls and adjusted the Call spreads at 30 deltas, the debit paid to close the Call spreads would have been roughly 3.00 (net 2.00 loss per spread), and the overall dollar loss would have been 2.00 * 10 * 100 = $2,000. So, same loss but we would have already taken a loss and adjusted to something like 2,615/2625 with a market that strictly speaking has not reached an overbought extreme yet as per our definition. If SPX finally hits 2,570 and we adjust, not only will we have given ourselves better chances to be right, but the new position will be higher up around 2630 which is obviously safer.

Given how far we are from expiration and given how vicious this bull has been, it is hard to convince oneself that SPX will not go up a mere 0.8% in 6 weeks from here. So, I'm thinking hard about taking a loss on the Call side now that will be mitigated by the credits collected from the Put side.

NOV SPX 2425/2420 Credit Put spread
Net Credit $250. Six weeks to expiration. Small position of ten 5-point wide spreads.
(Click on image to enlarge)
Because of how small this position is, I can afford to delay the adjustment until SPX 2,430 (compared to the typical Credit Put spread size I use, this position is only one fourth the typical size).

With this credit ($250) and the credit from the 2315/2325 Put spread ($1000), we have a total credit of $1,250 in November Put options in SPX. Any loss on the SPX 2575/2585 Credit Call spread that is smaller than $1,250 will result in a net winner by the end thanks to all the credit we have from the Put side. The 2575/2585 Call spread can be closed for 3.10 debit now (a net 2.10 loss in those 5 spreads = $1,050). So, right now I can close those Calls, avoid the headaches and still end up with a small net winner. That's where my focus will be.

NOV RUT 1380/1390/1580/1590 Unbalanced Iron Condor
Net credit: $1,555. Six weeks to expiration.
(Click on image to enlarge)
Defense lines: 1,440 to the downside (adjust Put spread) and 1,575 to the upside (adjust Call spread). Both price points are unlikely for the upcoming week.

Action Plan for the Week

- I'll focus on taking the Nov SPX 2575/2585 Credit Call spread off the table this week. It is not mentally easy to remove it at a loss. But closing it for anything less than 3.50 debit results in a net small winner by November expiration when the Put side is factored in. The smaller the debit to pay, the better. I'll be looking at market action on Monday, waiting to close this spread for as little debit as possible. Some market weakness early on would be great. A decline to SPX 2,535 would be ideal and I'd be closing it at a smaller loss if that happens. But, we may never get that decline. So, I'll try to close it by end of day or on Tuesday at less than 3.50 debit anyway. If, on the other hand, we wake up in rally mode and it becomes impossible to close at anything better than 3.50 debit, then I will simply wait for the SPX 2,570 adjustment condition.

-If I get to close the 2575/2585 Call spread early on for a smaller than 3.50 debit , I will be willing to deploy a 2635/2640 later in the week in the event the market rallies and reaches and overbought condition. I'd be looking for 0.45 - 0.50 debit on a 5 point spread (10 spreads) or 0.90 - 0.95 credit on a 10-point spread (5 spreads).

Economic Calendar
Thursday: US PPI
Friday: Core CPI, Retail Sales, Michigan Consumer Sentiment and Expectations.

Take it easy folks,

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