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Saturday, February 10, 2018

Weekend Portfolio Analysis (February 10, 2018)

This week's analysis has been published at LTOptions.com

Download Weekend Portfolio Analysis (2018-02-10).pdf

If the above link doesn't work for you, simply log in to LTOptions.com, 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The Weekend Portfolio Analysis will be available on this site next week for historical reference.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 (February 3, 2018) 
Without a doubt, this was the worst week (Credit Spreads trading wise) since I started writing on this site seven years ago. So far in 2018, not a single Iron Condor or Elephant has worked. They have been either hurt on the Call side, or on the Put side, or both.

Despite inevitable bad streaks in the past, I was never down more than 15%. Well, this time I am. 27% to be precise. And it is important to make a pause an analyze why this happened.

- Aggressiveness on the Call side. I started the year finding myself on a couple of 2:1 Iron Condors. Thinking we were too overextended to the upside, I became aggressive using 2:1 ratios instead of the 4:1. Well, I was right that the markets had gone too far up, but not right on the timing. The 4:1's were the variation to play, and not only looking at it in retrospective. No. That was the variation to play, simply because that is the one. The one profoundly learned after years experiencing how uncomfortable an inefficient it is to defend the Call side. Playing aggressive Call sides led to taking unnecessary additional losses, which, later led me to try to make up by selling more Credit Put spreads than usual, and that causes to the second problem.

- Risk Concentration. On Monday there was a point where I was riding five different Credit Put spreads. This is sacrilegious in the original LTOptions materials, where riding three spreads on the same direction was deemed the max healthy limit. Talking about concentration. In the previous weekend analysis, I mentioned that one of two RUT Credit Put spreads needed to be closed due to similarities in the projected adjustment point. I could have done it early on at a small loss or a scratch on Monday, and not taken two losses as it eventually happened.

Not being aggressive on the Call side on the way up would have made my losses smaller. Consequently the desire to make up for them quickly (by selling more Puts) would have been smaller, leading to less risk concentration on the Put side and eventually smaller losses on that side of the spectrum too. Losses would have existed. No doubt about that, but the draw-down I'm seeing today would have been way smaller (around 10% instead of 27%).

I could mention other mistakes, like thinking that markets don't crash from all-time highs. Another confirmation that markets can do anything at any time including breaking any previous record of whatever stat you are looking at. Finally complacency. Years of relentless bullish action that lead to overconfidence on the Put side.

The original principles of the system are fine, and I'm going back to them. It is rarely the strategy who fails when it has been designed with risk calculation in mind. It is usually leverage that kills you. And this is a case of that.

It is at times like this one when most just want to throw the towel. And I get it.....
I had a conversation on the phone this week with someone who wanted to end his life due to recent losses in the market. I tried to somehow talk him out of that. This is a tough game. The market is serious stuff with real lives and destinies being affected. Anyone who says otherwise is full of it.

...For me, throwing the towel, walking away and never writing again would have been the easy way out. I won't. I never will. Even if I finish the year down 100% and end up totally ridiculed. At least, that would leave more value on one corner of the Internet. A legacy about  "what one must absolutely not do when trading Credit Spreads".


Recent Trading Activity

Monday
Closed Feb. RUT/IWM - 1455/1460 - 147 Elephant Put side $5500
Opened Feb. RUT - 1340/1335 Credit Put spread ($1400 credit)

Closed Mar. RUT - 1450/1440 Iron Condor Put side $3940
Opened Mar. RUT - 1330/1320 Credit Put spread ($1400 credit)

Closed Mar. SPX/SPY 2940/2950 - 295 Elephant Call side for gains $379
Closed Mar. SPX 2615/2625 Elephant Put side $2980  
Opened Mar. SPX 2400/2390 Credit Put spread ($1280 credit)

Opened Apr. RUT - 1330/1320 Credit Put spread ($610 credit)   

Bought 2 December SPY  295 Calls @5.28 debit
Bought 1 January 2019 SVXY, 120 Call @18.50 debit
===============================================================

Tuesday
On Tuesday morning, I basically woke up with the decision to liquidate the excessive Put side exposure, without waiting for 30 deltas or anything like that. I only left the two safest positions on.

Closed Apr RUT - 1330/1320 Credit Put spread (which had been initiated the previous day) $540

Closed Mar SPX - 2400/2390 Credit Put spread (which had been initiated the previous day) $1320

Closed Feb RUT - 1340/1335 Credit Put spread (which had been initiated the previous day) $1200

Closed Feb SPX - 2625/2620 Credit Put spread $1200
Closed Feb SPX 2520/2525 Credit Put spreads $0

Opened SPX June 2050/2025 Credit Put spread ($1320 credit)

Bought SPY - December31 Long 287 Calls  @7.24 debit 
Bought SVXY - January 2019 Long 17.5 Calls  @4.75 debit  
Bought SPY - Dec Synthethic stock (long 264 Call/Short 264 Put) same as being long 200 shares

===============================================================

Wednesday
Bought SVXY January 2017 Long 13 Calls @4.85 debit

Market Conditions
(Click on image to enlarge)
Stochastics: 19 (Oversold. Up from 13)
McClellan: -224 (Oversold. Up from -272)
Stocks above their 20 DMA: 10% (Oversold. Down from 25%)

Oversold

Except for the number of stocks above their 20-DMA, the other two oscillators are higher than last week, and yet prices are lower than last week. So, now it is the opposite situation: an incipient bullish divergence. The number of stocks above their 20-DMA is ridiculously low. In the longer time-frame, 49% of stocks are above their 200-Day average. So, there is still downside room. It's been a while since the market last closed below its 200-Day. It's overdue and looks like it will happen this year. My bet is that the current sell off however, is near its end and eventually we touch the 200-day later this year.

The Russell Index: (Click on image to enlarge)
Both indexes are now similarly oversold. Both close to the 200 day average. The long term uptrend support is a little lower for RUT but those tend to not matter during true panic situations. Same view here: I think the sell off is near its end, opening the door to more normal price action.

The good thing is that it will be hard to suddenly go back to the old 9-10 VIX days. Many traders will be more fearful of recklessly selling volatility for a while, until the recent pain fades away from their memories. That may take a while. VIX at 29 is way above its historical average. So, we know it will come down, but as long as it stays between 15 and 20, it would be wonderful, finally, for the options selling business.


Current Portfolio

These are the current positions:

Too many of them to go one by one, plus really far out in time.
The SPY Calls and SVXY Calls expire in December and January of next year. Same as the Synthetic stock position, which is equivalent to being long 200 shares of SPY, but needing much less buying power. The goal with all of them is to hold them for as long as possible. They may fail, of course, but they are calculated risks. All the SPY and SVXY Calls barely add up to seven grand. Or 7% of the original 100K portfolio. The synthetic SPY stock position occupies decent room, but the only way all that money is lost is with SPY going to zero, because it is the same as being long the stock.

As for SPY long Calls, I'm not done yet. I will add 1% or 2% more when/if we close firmly below the 200 day average. I also sold December SPY 185 Puts for 4.00 credit on Friday. Naked Puts. However, I will not reflect that position here. First because I have never discussed naked options selling. Second because this was not the trader but the investor in me. This is me saying, hey, give me $400 bucks Mr Market, and if you are below SPX 1850 by December expiration, please, do assign me SPY shares at a cost basis of 181 and I will be a happy long-term shareholder.

Let's now look at the income plays.


Mar. RUT 1320/1330/1680/1690 Unbalanced Iron Condor
Net Credit: $1,660. Five weeks to expiration.
(Click on image to enlarge)
Defense lines: 1395 (adjust Put spreads). 1640 Close Call side at a loss.


June. SPX 2025/2050 Credit Put spread
Net Credit: $1,320 and eighteen weeks to expiration
(Click on image to enlarge)
Defense line: 2330 (adjust the Put side). Rough estimate as it is so far out in time.


Action Plan for the Week

1- This week will be a matter of defending the Put sides when/if necessary.

2- I'll buy more SPY Calls after a close below the 200 Day moving average.

3- I want to open an April RUT or SPX Put spread. We are still 10 weeks away from April expiration and I already have two credit Put spreads in play. So, I'm going to wait. That would be triple Credit Put spread exposure. Granted, with volatility already elevated it is different than with VIX below 10. A much nicer opportunity now. I guess I'll wait to see if we get more ridiculously oversold that allows me to enter a Credit Put spread in the low 2200's for SPX, or the low 1200's for RUT. But, on a market rebound, I'll just stay Put and do nothing for now.



Economic Calendar
It was kind of funny to see the financial networks trying to find a "headline" to justify the recent market sell off. Nop. Pure offer vs demand in the face of overvaluations.

These are the main events in the Economic calendar this week:

Monday: US Federal Budget Balance.
Wednesday: Germany's GDP and Europe GDP. Europe Industrial production. US Retail and Core Retail Sales.
Thursday: NY Empire State Manufacturing Index. Philly Fed Index. PPI.
Friday: Building Permits, Housing Starts, Michigan Consumer Expectations.

Trade safely my friends.
LT


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Check out 2018 Track Record


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