Weekend Portfolio Analysis (October 18, 2014)

There's a colleague at work who is a terrible trader (Sorry John! you said so yourself. You know how much I love you). Anyways, he is a very smart guy and has been trading for 2 decades. He obviously knows way more than I will ever know about the markets. He's able to articulate concepts really well and knows every single options strategy you can think of. However,..........he's pretty good at losing money little by little. Not huge draw-downs, but consistent frequent small losses. He realized that will always be the case. Yet, he still trades! He does it for fun, to satisfy his addiction. He just trades a very small amount that doesn't represent anything to his family at this point in his life, but he admits he just can't get away from it. I don't blame him! I don't blame him at all. You know why? Because of weeks like this one we just had! Even if I lose money, provided it is not a serious draw-down, it is great to live through this. Few things make you feel alive as the markets. It's great to be in touch with your raw feelings, in constant conflict between greed and fear and it's great entertainment value to see everybody panicking and talking about the markets.

This was a very exciting week. The S&P500 started the week at 1905.65 and closed at 1886.76. Just a 1% decline! Did you know it was just a 1% decline after all the panic we experienced? Only 1% after all.

Market conditions
(Click on image to enlarge)
 
Stochastics: 33 (neutral)
McClellan: +35 (neutral)
36% of stocks are trading above their 20 Day Moving Average (neutral)

Back to no man's land, where there is good room to move in either direction. I personally think the downside room is a bit limited as we are closer to an oversold extreme than to an overbought one. But hey, that's just me. Anyways, with the VIX above 20 it is a good time for selling Puts. For example the 90% probability Put spread using SPX December options is the 1600/1605 spread. That's very decent distance.


October positions
No more October positions. The RUT 1230/1240 Bear Call Spread finally expired worthless for max profit on Friday. October was a shitty month, but not disastrous. With this Call spread the model portfolio gained $220. This was part of an Iron Condor whose Put side lost $328. To recap, an adjustment was made where new Puts were sold farther out of the money using November options. That new credit can totally overcome the October loss, but in order to keep the track record clean and simple I like to reflect that new spread as part of the November cycle, which is where it belongs. Because of that, the performance of the portfolio up to October expiration is +16.68%. October resulted in a 1.02% portfolio draw-down.


November positions
November RUT 970/980 Credit Put Spread
$120 credit. 89% probability of success and 33 days to expiration. Now part of 970/980/1150/1160 Iron Condor. Will adjust if RUT goes down to 1030 this upcoming week.

November RUT 910/920 Credit Put Spread
This position was opened as part of the adjustment to the 1020/1030/1234/1240 October Iron Condor. $201 credit. 98% probability of success, 33 days to expiration. Opened for 0.67 credit. Closing it for 0.20 debit will totally cover the loss on the October Iron Condor.

November RUT 1150/1160 Credit Call spread
$200 credit. 33 days to expiration. Will help me mitigate the excessive downside exposure on the portfolio should the market keep falling. On the other hand it will need an adjustment if RUT moves past 1120.

November SPX 1685/1690 Credit Put Spread
$120 credit. 94% probability of success, 33 days to expiration. It shouldn't have problems in the next few days.


Action plan for the week
You don't think fear, you feel it. Do you know when you feel it even more? When you don't know the magnitude of your potential losses in advance. Because of that and in order to find some peace of mind, I'll take a look at the 3 most likely scenarios that could unfold in this expiration cycle. Yes we can correct 20% in a month, we can also rally 12% in a month, but those are not likely scenarios. Those take place once in a generation. So, here we go.

Scenario number one: A quiet market.
If RUT simply oscillates between 1030 and 1120 from here until November expiration it would be wonderful. Everything would expire for max profit and I would end up with a solid +3% growth which would catapult the performance of the portfolio to almost 20% for the year. Sadly, I don't think this is very likely to happen. Being more scientific, there is only a 40% statistical chance for this to be the case.


Scenario number two: A strong market.
RUT rallies like the beast it is, penetrating the 1120 mark. In this case I would adjust the 1150/1160 Credit Call spread. Once it reaches the 30% probability it is worth around 3.50 debit. The loss in dollar terms would be $500 ($700 debit to close - $200 original credit received). I would immediately deploy a farther out of the Money Credit spread in the 1195-1200 area which would bring a new $200 credit. This one would presumably end up being a winner at expiration taking the final loss from $500 down to $300.

In this scenario the other 3 Credit Put spreads expire for max profit without problem, which would allow me to collect a credit of $441 ($120 + $201 + $120).

The gains from the 3 Credit Put spreads would be greater than the loss on the RUT 1150/1160 Credit Call spread with adjustment.


Scenario number 3: A weak market:
Obviously this would depend on how weak. A 1987 like market crash would hurt me and many traders out there. I'm not alone. The good thing is that my Put spreads are pretty far out already and a volatility explosion would allow me to position new adjustments in the 1300-1400 SPX's or low 700's for RUT. Anyways, those types of crashes only take place once every two decades, even though we fear them every single day. Therein my opinion that it is an unlikely event. I will assume however, a more realistic case where the market corrects an extra 5% - 8% from here within a month, taking RUT to below 1030 in the process. In this case I would adjust the 970/980 RUT Credit Put spread. Once it reaches the 30% probability it is worth around 2.20 debit. The loss in dollar terms would be $320 ($440 debit to close - $120 original credit received). I would immediately deploy a farther out of the Money Credit spread in the high 8 hundreds area. That would bring a new $120 credit which would presumably end up being a winner at expiration taking the final loss from $320 down to $200 on this particular spread.

In this scenario the other three positions expire worthless yielding max profit: RUT 910/920 Credit Put spread ($201), RUT 1150/1160 Credit Call spread ($200), SPX 1685/1690 Credit Put spread ($120). Total credit $521. These gains would totally neutralize the loss on the 970/980 Put spread described in the previous paragraph.

Ohhhh the Lazy Trader! So full of it as usual! How come he will win no matter what? He's tricking us with his fancy words!! wa wa wa!!!

I didn't say I would have a positive November. In fact, as of this writing I have closed two November positions and the portfolio is down about 2% in November. What my analysis indicates is that the bleeding has stopped and it's unlikely for losses to keep piling up with these positions I have on right now.

For larger moves, for example RUT above 1180 or below 980, or SPX below 1760 in less than a month I would be in more trouble and would have to make adjustments to spreads that I consider safe right now from the comfort of my living room.

Scenario number two would be the one bringing a smaller return for the portfolio. However, I prefer to experience that one rather than scenario number 3. Scenario number 3 would be nerve wracking and everybody will be thinking about the apocalypse. My biggest risk is to the downside due to the triple exposure with Credit PUT spreads in the case of a severe market crash.

I know today's portfolio analysis was lengthy. But it was necessary. If you made it through here you have the liver of a Lion and perhaps the patience of a Buddha. Kudos to you for not jumping off to some other cheap entertainment source on the internet.


The two positions that are more likely to be threatened are obviously the 970/980 RUT Credit Put spread and the 1150/1160 RUT Credit Call spread. Will I take them all the way to expiration? Probably not. Keeping so much margin locked would limit my ability to start trading the December expiration cycle. So, if I can exit the 970/980 RUT Credit Put spread for breakeven or a small profit, I'll do it. Ditto for the 1150/1160 RUT Credit Call spread if I can close it for 0.35 debit or so (originally received 1.00 credit).


Long term Investing
I was pretty active with my long term investments this week but decided to not write one article for each purchase. It would have been too boring.

So, to keep it short, I bought:
42 shares of Suncor Energy (SU.TO) at $35.43. Dividend 3.16% (Great value at this price)
12 shares of Rogers (RCI.B.TO) at $41.20. Dividend 4.47%
59 shares of RioCan Real Estate (REI.UN.TO) at $25.28. Dividend 5.60% (Very happy with this price)
49 shares of Great West Life (GWO.TO) at $30.50. Dividend 4.03% (Meh,...didn't time it very well)

With these purchases my projected yearly dividend income is now 1799.71 Canadian dollars plus 409.28 US dollars.


Economic Calendar
Monday: Chinese GDP and Industrial Production
Tuesday: US Existing Home Sales
Wednesday: US CPI. China HSBC Manufacturing PMI.
Thursday: German Manufacturing and Services PMI
Friday: US New Home Sales

Good luck this week folks!

Check out 2014 Track Record

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