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Saturday, January 27, 2018

Weekend Portfolio Analysis (January 27, 2018)

This week's analysis has been published at

Download Weekend Portfolio Analysis (2018-01-27).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The Weekend Portfolio Analysis will be available on this site next week for historical reference.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 2018 Track Record page

Last Weekend Analysis now publicly available:
Weekend Portfolio Analysis (January 20, 2018) 
Important Note 1: New material has been added to the LTOptions's library. Elephants vs Iron Condors (Full Comparison) is an eBook that details among other things: key differences between the two strategies; pros and cons; which one performs better according to the environment; evolution of the T+0 line over time, etc. This new eBook is visible on the page that comes right after logging in: 

Important Note 2: Some modifications have recently been made to the 2018 Options Trading Plan. The changes are focused on efficiency and simplicity when defending Credit Call spreads. Log in to and consult the 2018 Options Trading Plan ebook.

Recent Trading Activity

- On Monday I closed the Feb SPX 2825/2830 Credit Call spreads along with the partial hedges that had been added: Feb SPY 282 Long Calls. A loss on the Credit Calls plus a gain on the long Call hedge. Net net it was a $3300 loss.

- Purchased SPY March 290 Calls as an upside hedge for the 2900/2905 Credit Call spreads on Tuesday.

There's no denying that we are off to a bad start. The bleeding however, is over. Or almost over, as those March SPX Credit Call spreads are suffering losses and they are still in play. Combining all the losses that are direct result of this historic rally, the portfolio will be down by about 9% (2.8% with January positions, about 4.2% with February positions, and about 2% more with March positions - See Track record page).

Usually, Iron Condor / Credit spread traders are down 25% to 30% after a rally of these proportions. Countless of them have sadly disappeared in recent years due to rallies that are nothing compared to this one. This is the worst possible environment for index premium sellers (unless all you do is sell Puts of course). Prior to 2013 the Credit spreads selling business looked almost too easy. It wasn't hard to find several websites discussing Iron Condors, Bear Call Spreads and Bull Put spreads showing impressive returns. Especially after 12 cruel years (1999 - 2011) where the market went nowhere and pundits were saying things like "Buy and Hold is dead" or "The 60/40 portfolio doesn't work anymore". How times change!

Back to our current situation. It has become clear to me that overcoming this draw-down will be a challenge if we intend to do it purely based on Credit Spreads. It is doable, but to achieve it using only that tool takes some months. Consequently, part of our recovery will be based on adopting new tactics, which will be explained below in the Action Plan section.

Market Conditions
(Click on image to enlarge)
Stochastics: 88 (Overbought. Down from 93 last week and 95 the week before)
McClellan: -11 (Neutral. Same as last week)
Stocks above their 20 DMA: 65% (Neutral. Down from 70% last week and 74% the week before)

No man's land

It continues to impress me that such a huge index keeps relentlessly going up and yet the three indicators we typically use (and others) are telling a different story. If anything they have been slightly going down since last week. This bearish divergence normally tells me that weakness is around the corner. Or at least that's what I would have normally thought all these years. 2018 has been a remarkable exception. Pure definition of euphoria. I have no doubt that we are witnessing history right here. How it unfolds remains to be seen of course, but it is certainly the type of price action I have never experienced in 7 years or so of trading. Not only did the market break a record in 2017 after being up every single month. Something which had never been achieved in the past (not a single negative month in an entire year). If you add to that, that the market rallied right after Trump's election (November and December 2016), now you have 14 months. Add to that January 2018 and that's 15 months of relentless bullish price action and record low volatility.

The SPX index is now 6.74% higher than its 50-Day average. This is historic. I had never seen anything above 4.5% until now, usually 3.5% signaling a temporary top. Despite the fact that the oscillators are showing an incipient bearish divergence, price action, as usual, must be respected and bearish positions defended accordingly. Too many lunatics out there.

Another interesting fact is seeing a higher VIX. At the end of the first trading session of the year (January 2), the VIX closed at 9.77. Right now it is above 11, even though the market has done nothing but continuously move up. Interesting times indeed.

The Russell:
(Click on image to enlarge)
This is much more normal price action. Long term resistance also broken, but moves within the expected ranges and safe positions as a consequence.

Current Portfolio

Feb. SPX 2520/2525 Credit Put spread
with additional 2625/2630 Credit Put spread
Net credit: $1,300. Three weeks to expiration.
(Click on image to enlarge)
Defense line: 2,630 (adjust the small 2625/2620 Credit Put spread. This is obviously a safe position and I intend to ride it until the end.

Feb. RUT/IWM - 1455/1460 - 147 Elephant Put side
Net Credit: $1,060. Three weeks to expiration.
(Click on image to enlarge)
Defense lines: 1,500 (adjust Put side). Also a very safe one. Should give us no trouble.

Mar. SPX 2900/2905 Credit Call spread
partially hedged with Long SPY 290 Calls
Net Credit: $300
(Click on image to enlarge)
Defense line at 2,895. That was the original plan. I, however, will be taking a loss on Monday here. More aggressive traders can give themselves more time to be right.

Mar. RUT 1440/1450/1680/1690 Unbalanced Iron Condor
Net Credit: $1,680. Seven weeks to expiration.
(Click on image to enlarge)
Defense lines: 1510 (adjust Put spreads). 1635 Close Call side at a loss. The Credit collected on the Put side on entry will more than compensate for the hypothetical Call side loss. Additionally a small Credit Put spread can be initiated around 10 deltas at that point.

Action Plan for the Week and additional ideas going forward

- I'll close the March 2900/2905 Credit Call spreads at a loss in conjunction with the long SPY 290 Calls that were added as upside hedge. The loss will be around $1800 (1.8% of a 100 grand portfolio). Waiting until SPX 2,895 would cause a loss of around $2,150 (or roughly 2.2% portfolio loss). Again, more aggressive traders can still use that line on the sand, giving themselves more time to be right. In my case, I just want to eliminate upside exposure here and get the bleeding over with.

- If RUT reaches 1635 or so, I'll close the Call side (1680/1690) of the March Unbalanced Iron Condor at a loss. 1635 is the estimated price level at which the 1680 Calls would hypothetically reach 30 deltas. In practice it can be a little more: 1640, or a little less 1632. It is better to set up an alert based on the delta of the option directly (read this article on how to do it using the ThinkOrSwim platform). I'm using 1,635 as an approximation for those that have no way of setting up automatic alerts based on delta on their platforms. Taking the small Call side off would be done at a small loss, unable to turn the whole position into a net loser based on the Put side credit. I will also sell a small Credit Put spread at 10 deltas in that scenario (that would probably be around RUT 1500) deploying one quarter of the capital that was deployed on the original credit put spread (so, five 10-point wide Credit Put spreads in my case, or ten 5-point wide ones).

- Late in the week, I will be adding the second position of the March expiration cycle. I will go with SPX since we used RUT for the first position. Normally I would go with an Elephant, but in this case, the market looks so extended to the upside, that I am willing to go with a 4:1 Unbalanced Iron Condor too. With our new action plan for threatened Call spreads, based on not adjusting them, taking a small loss early that is smaller than the Put side credit, I’m not afraid of the Call side, let alone at these levels. So, for this cycle either an Elephant or an SPX Unbalanced Iron Condor is ok.

- Finally my personal plan looking for more explosive returns this year. You may not like it: It consists of.... (This is a more long-term action plan, only available inside

Economic Calendar
A pretty heavy week in front of us:

Tuesday: Europe's GDP. US Consumer Confidence. China's Manufacturing PMI.
Wednesday: Europe's CPI and Unemployment Rate. US Pending Home Sales. FOMC and Interest Rate Decision.
Thursday: Europe's Manufacturing PMI. US ISM Manufacturing PMI.
Friday: US Non-Farm Payrolls, Unemployment Rate.

Good luck this week my friends.

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 2018 Track Record

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