Daily Market Newsletter

December 17, 2016

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Market Commentary

Another profitable month, in one of the most bizarre market conditions that we’ve seen in years. Once again, we learn that when everyone assumes the same thing, that everyone will be wrong. The Trump election was a true game-changer in the financial world; putting a Capitalist in charge will have a significant impact across world markets. I think that we will transition from a nervous, policy-driven market into a much more emotion-fed, volatile, opportunistic market that will mute out these policy distractions such as the “every-six-weeks” FOMC release. The flip side of that, however, is that traders will live in fear of “The Tweet.” Whenever Trump feels like it, he will Tweet out whatever is on his mind in the middle of the night, so get used to waking up with surprises in your portfolio. Managing risk and seizing opportunity will be the mantra of 2017.

Once upon a time I heard a (rather famous) options educator make the statement, “there are dozens of ways to make money with options, and there are hundreds of ways to lose money with options.” I listened and took notes and made mistakes and learned how not to screw up with options, however I got a little sloppy this month. I neglected to factor in DIVIDENDS to this month’s trades. Had the price been a little higher on Thursday, I would have woken up to a pile of short shares from my SPY butterfly short options being assigned. This would not have necessarily blown up the trade, as the long options would have held their value….so I could have just shut down the trade. The hidden liability would be the dividend of $1.33/share that I would need to pay as a holder of record of short shares. In this weekend’s video I’ll show a trick that you can use to know whether or not you should close positions ahead of Ex-Dividend..

If the above video does not work, please try this link.

Offensive Actions

Offensive Actions for the next trading day:

I will place an expected-move butterfly into the 28DEC cycle of the SPY, and an expected-move vertical into the 30DEC cycle; see “Whale” setups below.

Defensive Actions

Defensive actions for the next trading day:

Any vertical, butterfly, or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
The 23DEC LP Iron Condor is risk-managed with the initial setup, however if the price is going to continue screaming to the upside, we’ll hedge the position with the SPY butterfly (and closed vertical) spreads that we already have in place.
I will discuss SPY Calendar defense in today’s video.
I will help hedge the 3JAN LP Condor with the expected-move SPY trades entered on Monday.

Strategy Summary Graphs

Each graph below represents a summary of the current performance of a strategy category. For an explanation of what the graphs mean, watch this video.

Non-Directional Strategies

Semi-Directional Strategies

Directional Strategies

Technical Analysis Section

Market Internals: Volume was above average Friday. Breadth was mixed with -77 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened within the Upper Reversal Zone, showing a bullish bias. No leading signals at this time.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell 4.61% to 12.20, back inside the bollinger bands. The RVX fell 8.14% to 16.24 and is below the bollinger bands.

Fibonacci Retracements: Fibs (retracements and extensions) are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with no overhead resistance. The RUT has support at RUT 1300 with no overhead resistance. All three major index charts that we follow are now showing a Golden Cross with the 50 day moving average crossing above the 200 day average.

Fractal Energies: The major timeframe (Monthly) is still charged with a reading of 44. The Weekly chart is declining with an energy reading of 43, due to the recent breakout. The Daily chart is showing a level of 36 which is at technical exhaustion for the seventh day in a row. We are seeing the expected short consolidation at this level.

Other Technicals: The SPX Stochastics indicator rose to 82, overbought. The RUT Stochastics indicator rose to 76, below overbought. The SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2166 and resistance at the upper band at 2280 and is at the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1300 to 1394 and price is at the upper band.

We are seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. I think this will bring about a big shift in how the market behaves.

I had the following trades in place for the 16DEC 2016 Options cycle:

High Probability Iron Condors

No HP Iron Condors traded during this period

Low Probability Iron Condors

No LP Iron Condors were closed in this period; two were set up that will close in the JAN17 cycle.

Time Spreads

UPS 25NOV/2DEC 111/113 call diagonal (11/17) was entered for a $.97 credit. and was closed for a $1.90 debit. This gave me a net $97/contract loss.
MS 2DEC/9DEC 39/41 Call Diagonal (11/21) was entered for a $1.10 credit. I closed this position (12/2) for a $1.63 debit. This gave me a net loss on the position of $57.
M 9DEC/16DEC 42.5/44.5 short call diagonal (11/28) – entered for a $.98 credit.Exited (11/30) for a $.38 debit; this gave me a net profit of $56/contract after commissions or a 55% return on risk …
AAL 9DEC/16DEC 45/47 short call diagonal (11/28) – entered for a $.94 credit. I decided to use today’s slight weakness to close the position for a $.58 debit. This gave me a net profit of $32/contract or a 30% return on risk.

Cash-Secured Puts/Covered Calls

No covered calls or cash-secured puts traded during this period.

Directional Swing

SPY 28 DEC 225/227 Call Vertical (12/5) added this position for a $.19 debit and was closed (12/12) for a $1.19 credit. This gave me a net profit after commissions of $96/contract or $480 net on five contracts, or a 457% return on capital. .

Hindenburg

No Hindenburg positions were closed during this period.

Monthly Performance Commentary – I think we truly saw the market change character during this options cycle. The market is in the process of transitioning from one of uncertainty driven by Fed policy….to one driven by opportunity and “animal spirits.” Every time that there is a fundamental change in character, it does take some time to adjust to it but I can say that we have definitely not been fighting it. I truly believe that the diagonals will become a great weapon for us going forward, once the market calms down a little bit and finishes balancing out the supply/demand imbalance.

What We Did Wrong

Any issues this month were related to lost opportunities to catch this massive trend in action. I had a brief opportunity to catch the 8/21 ema swing on the early december dip, but I whiffed.

What We Did Right

I did not force what appeared to be an “easy” iron condor by placing call spreads above all-time highs. I felt that this condition was a trap for the HP condor.
We did catch a very nice EM vertical spread that worked out much earlier than expected. .

What Needs to Be Changed for Next Cycle

If you’re not long, you’re wrong in this market. I will become more cautious as the larger timeframes run out of gas and will transition over to more neutral strategies at that time.

Position Management – NonDirectional Trades

I have no positions in play; I will wait on the first significant pullback to allow me to secure put spreads below support.

Offense: I still do not want to set up OTM credit spreads in this low-vol environment until we see real movement to the downside. If and when we get this movement we’ll need to identify levels that we want our credit spreads to be “below.” This is the same type of price action that was so perilous to HP condors back in 2013, so let’s not fight it.

I have the following positions.

SPX 23DEC 2165/2170*2230/2235 LP Iron Condor (12/5) was entered for a $2.50 credit. I will look for a $2.00 closing debit in the coming days. I do not have any “defense” for this position, it is risk-managed from day one, however I will take a quick exit if I see the price pull back into the Condor range.
SPX 3JAN 2225/2230*2285/2290 LP Iron Condor (12/15) was entered for a $2.50 credit. I will look for a $2 closing debit.

..We have five days remaining for the price to pull back and give us an elegant exit on the 23DEC position. This will take a 30 point pullback which is unlikely. I will focus on closing the call spreads only. The 3JAN position is doing well.

I have the following positions:

C 23DEC/30 DEC 58.5/60.5 Call Diagonal (12/12) was entered for a $.96 credit. I will look for about a 50% return on risk to exit this trade. If I see the price breaking above the $61 level I will likely just close the trade.
SPY 28DEC/20JAN 226 Put Calendar (12/15) was entered for a $1.30 debit. I will look for about a 10% return from this trade. My upside adjustment point is SPY 228.6, at which point I will add the SPY 231 call calendar in the same series. If the price pulls back lower, this is actually better for the position as rebounds are usually sharp, so I will not adjust the downside action point.

Please note: If you trade these positions please keep the size small, to the point where you “do not care” about the success or failure of this position.

I have the following positions in play:

SDS Stock – I still own 100 shares of this stock from 2011 and will continue to write calls against this position with every correction/pullback.
VXX Stock – I own 12 shares of this stock and will hold until Armageddon occurs.
SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level, and will continue to write time against these shares on every rally. I will look to sell more calls in the next bounce higher in SLV. If the price continues pulling back, I will likely sell more puts against the $13 level.
GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit
TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit.
RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 credit.

Nothing to do at this time with current positions. I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. On the next decent pullback I will be fairly active; I don’t want to “chase” prices right now.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover. .
RSI(2) CounterTrend – Awaiting the next signal; it should be very powerful and worth the wait..
Daily S&P Advancers – if I see the number of daily S&P500 advancers drop into single digits near the close of any trading day, I will go long shares of the SSO.

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge.

No positions at this time. Once the S&P hits an exhaustion level on the weekly chart, I will consider a vertical debit put spread to catch any volatility to the downside.

I have the following positions:

SPY 28DEC 224/226/228 Call Butterfly (12/5) – added this position for $.21 debit. I will hang onto the Butterfly position as long as I’m in the 23DEC SPX LP Condor, or if the price starts to close outside the upside expiration envelope of the Butterfly.

I like the idea of a grind higher into year-end. If we do get this move higher, these trades will explode in value. If the price does NOT move higher, then the iron condors will score. You can set up either or both of these trades depending on your capital and strength of forecast. I will set up the following trades Monday morning:

SPY 28DEC 226.5/228.5/230.5 Call Butterfly – based on the morning gap, if it opens flat I will use these strike prices to set up a $2-wide butterfly at the expected move. Afterhours I show this trade is going for about a $.32 debit.
SPY 30DEC 227.5/230 Call Vertical – same deal as above, using a vertical spread instead. If Monday morning shows that more strikes have been printed, then I will choose a $2-wide spread that centers around the expected move.

The “Hindenburg Strategy” is meant to capture “value” from successive corrections that lead up to the final “death spiral” with a Bear Market. The basic principle is to buy 3-month out long puts on the SPY, and to finance those puts by the sale of credit spreads.

I am due to add the MAR puts on Monday. I will hold off until the SPX Weekly chart shows exhaustion and we can start to anticipate at least a volatile consolidation period. I do not believe we will see a crash from these levels until the sentiment hits euphoria.

Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment. I will only sell put spreads on decent pullbacks that allow me to secure put spreads 10% OTM

We currently have the following positions in play with this strategy:

SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.
SPY FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.