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Saturday, October 17, 2015

Weekend Portfolio Analysis (October 17, 2015)

The SPX index opened the week at 2015.65 and closed at 2033.11 for a 0.87% gain. It was a very quiet one for me where I didn't trade and I simply saw my two remaining October positions expire for max profit. I had an early loss with October options as I had sold an Iron Condor position back in August right before the crash, the worst moment to enter a Delta Neutral and Vega negative trade. However, with the adjustment made and an additional RUT play I ended up the cycle in positive territory. All the details of my trading activity in this cycle can be found here.

The Year To Date performance for the model portfolio is now +12.43% vs -1.25% for the S&P500. Two more months to go. I'll see if I can achieve that elusive 20% growth this year. Seems pretty challenging. Only time will tell.

Market Conditions
During the first three days of the week the S&P500 had a hard time breaking resistance in the 2020 area and with two consecutive red days, my recent Credit Call spread play started to make me look really smart. The last two days of the week however, were really strong and the 2020 resistance area is now irrelevant. So, I removed it from my charts. Next resistance level is around 2040 - 2045.

(Click on image to enlarge)
Stochastics: 85 (overbought)
McClellan: +178 (overbought)
Number of stocks above their 20 Day Moving Average: 74% (overbought)

For the second weekend in a row we are in an short term overbought extreme condition. This means that selling out of the money Calls with 30 - 45 days to expiration is the best play. Like I always say, the key here is "short term". In the longer time frame we are not overbought when most major indexes are below their 200 Day averages, so there is plenty of room to rally. But, in the short term we're at an extreme that needs to be relieved. For example during the past week, the market relieved its overbought condition on Tuesday and Wednesday and then it rallied a bit more. Under these circumstances it is very rare to see +2%, or +3% weeks. It tends to be a slow grind upwards until the short term exuberance is alleviated.

If I didn't have Credit Call plays already in, my play right now would be Nov SPX 2105/2110. The mid-price of that spread is 0.675. You should be able to get filled for 0.60 credit or so. I would be conservative playing only half the usual size so I can better mitigate the damage in case an adjustment is necessary, taking into account that, short term overbought condition aside, we're little by little entering the historically strongest period of the year for the markets.

Notice also the highlighted Bearish Divergence as the index makes higher highs while McClellan makes lower highs, suggesting that the market is being pushed up by fewer and fewer stocks. This also reinforces my conviction that a +2%, +3% super strong week is very unlikely at the moment.

November positions
SPX 1630/1640/2100/2110 Iron Condor
5 weeks to expiration, 76% probability of success. No concerns with the Put side. I'm still paying close attention to the Calls. They are not out of the woods yet.

RUT 1235/1240 Credit Call
5 weeks to expiration. 86% probability of success. Looking very solid and I have no concerns here.

Action Plan for the week
SPX is currently priced at 2033. If it reaches 2070 I will have to defend the 2100/2110 Nov Credit Call spread. That represents almost a +2% move, which as I mentioned I consider unlikely for the upcoming week, but we have to be ready for anything. I would be closing the Call spread for a loss and I would deploy a new Credit Call spread in the 2130/2140 area. Still using November options.

If we move sideways I won't do anything.

If the market retraces a bit and I get to see some profits on my 2100/2110 Credit Call spread I may close them early.

That's the defensive game.

In terms of offense, we will be 8 weeks away from December expiration by Friday. Because we are overbought I would start the cycle with a 2135/2140 Credit Call spread for 0.60 credit or better. But, this position would go through the end of October + entire November + first half of December, a historically strong period for the markets. Because of this I may add a Credit Put spread as well. So it would be a 1795/1800/2135/2140 Iron Condor. Looking for around 0.90 credit. My final position will be slightly different in the end as the markets will move during the week but you have a rough idea about what I'm planing to do. What's your opinion? How do you intend to start trading the December expiration cycle?

Economic Calendar
Sunday: China's GDP and Industrial Production
Tuesday: US Housing Starts and Building Permits
Wednesday: US Crude Oil Inventories
Thursday: US Existing Home Sales
Friday: Europe Services and Manufacturing PMI

That's it for now.
Good luck this week folks!


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