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Saturday, February 11, 2017

Weekend Portfolio Analysis (February 11, 2017)

This week's analysis has been published at

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The Weekend Portfolio Analysis will be available on this site next week for historical reference.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

Related Article: Weekend Portfolio Analysis (February 4, 2017) 
Recent Trading Activity

- No Activity.
As anticipated, given that none of the adjustment conditions outlined last weekend were met I made no defensive moves. On the offensive front, we are still very far from oversold conditions and far from the April monthly options expiration cycle.

Market Conditions

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Stochastics: 90 (overbought)
McClellan: +80 (neutral)
Stocks above their 20 DMA: 66% (neutral)

No man's land but getting close to an overly optimistic extreme.
We are now trading at the very top of the uptrend channel. I think gains from here will be hard fought. And of course, we can see a blow off top that penetrates the very upper end of the uptrend channel, but in my view further gains would be limited after that. I have been following the upper end of this channel for weeks and as long as price stays inside it, organized and disciplined, we are good. Even if the market maintains this dull, slow but steady upside price action  until the end of the year, if it is steady and slow, we'll do good. Some of our short Call positions will take some heat, but provided you are playing them unbalanced, there is really nothing to fear. More on that in a second.
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RUT still has some room to the upside before hitting the upper end of its channel. But because the position we have there is an Unbalanced Elephant, I don't really care how far up it goes. Remember, with Unbalanced Elephants we will make (the most) money if the index stays relatively neutral, we make (less but still a gain) money if the upside is threatened and closed at a loss, and we only lose money overall when the downside is threatened. For more details, remember to consult the Unbalanced Elephant guide.

Current Portfolio

MAR SPX 2090/2100/2360/2370 Unbalanced Iron Condor hedged with SPY 214 Put
$1,974 net credit (when subtracting the debit invested in the SPY Put). 5 weeks to expiration. 4 deltas on the Put side and 23 deltas on the Call side:

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We may need to get defensive here this week. Adjustment point still around 2,330 which is higher than what the uptrend channel suggests. But Technical Analysis is not a religion and as traders we must operate under the assumption that anything can happen at any time.

If the SPX 2360 Calls reach 30 deltas, there will be an adjustment where a new position will be deployed around SPX 2400, way above the uptrend channel, still using March options. Let's now estimate the damage:

How much debit will we need to pay in order to close the affected 2360/2370 Credit Call spread at 30 deltas?

We don't know for sure, but we can take a look at the 30 delta Credit Call spread at the moment to get a rough idea. The 2345/2355 is priced at 2.85, but it is at the 32 delta mark. The 2350/2360 is priced at 2.50 and it is at the 29 delta mark. So, at 30 deltas, the debit to close will be somewhere in between 2.50 and 2.85. Let's assume 2.75 for the sake of having a number. I'm putting it closer to the cost of the 32 delta spread.

Well, originally 0.90 credit was obtained for 10 spreads. Closing them at 2.75 debit represents a net loss of 0.90 - 2.75 = -1.85. Or $1,850 in dollar terms. This is just an estimate. The real loss may be $1900 or $1950. Or none if the market retraces.

Now $1,850 in a six figure account is less than a 2% loss. Not terrible.
By that point the 2100/2090 Credit Put spread will be virtually a winner. We played 20 of those for which we received 0.60 credit. That means we have $1,200 dollars on the Put side to compensate for this hypothetical loss on the Call side. The overall loss would now be -1850 + 1200 = -650 or less than 1% of the account. But, let's not forget about the adjustment. I plan to deploy 12 - 15 new Credit Call spreads in the 2400 area. Let's say 15 at an average credit of 0.90 , that would be $1,350. Even if you don't increase the number of spreads, let's say just 10, the new credit collected would be enough to eclipse the earlier loss when combined with the gains from the Put side. Yes, it wouldn't be a big winner, but a winner nonetheless. And the only reason this is possible, is because we played the Iron Condor in unbalanced fashion to begin with. Had we played the standard balanced Iron Condor, this wouldn't have been possible and it is the reason why traditional Iron Condor have been such a hard trade in the last few years of low volatility bull rallies.

MAR RUT/IWM 1235/1245/1450/1460/127/146 Unbalanced Elephant
$1,480 net credit. 5 weeks to expiration. I'm not really concerned with this one.

(Click on image to enlarge)
Defense lines at 1295 (Put spread adjustment) and 1420 (take Call side off at a small loss and just ride the Put side to compensate for it and end up with a winner overall in the end)

Action Plan for the Week

- Defend the March SPX Unbalanced Iron Condor if the index reaches 2,330. Call side adjustment to around SPX 2,400, way above the uptrend channel, where it should be safe without hassle.

- Defend the March RUT Unbalanced Elephant position in case the index reaches 1,420 by just closing the Call side at a small loss.

- April expiration is still 10 weeks away. For the next 2 weeks I will be waiting for an oversold condition in order to sell Credit Put spreads with March expiration. If such conditions do not materialize, then it's still a waiting game until April expiration is 8 weeks away, where a new Unbalanced Iron Condor will be entered.

Economic Calendar

Sunday: China's CPI and PPI
Monday: German GDP and Economic Sentiment. Europe GDP. US PPI. Fed Chair Yellen Testifies
Tuesday: Core CPI, Retail Sales, Fed Chair Yellen Testifies, Crude Oil Inventories
Wednesday: Philly Fed Index, Housing Starts, Building Permits

Good luck this week my friends,

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