February 20, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Another profitable month….that’s now eleven months in a row that we’ve been profitable, trading some pretty daunting volatility. I’ve made it my job to get more “in tune” with the market character ever since we saw the effects of central bank QE distort markets and turn them into something I’d never seen before in 2013, and that effort has paid off with much better consistency.
No matter where you go in the world of Options, you’ll earn yourself an argument depending on whether your religion is “probability” or “technical analysis.” The “probability” guys think that chart analysis is a waste of time, and a lot of charting guys think that predicting the future takes care of everything. I take more of an agnostic view on both, as my experience with trading options has shown that predicting performance based on probability is fraught with “n-standard deviation moves” that blow well beyond the expected move….and I also realize that there are just times where the price will do whatever it wants to do irrespective of what your “indicator” shows. Why not use both, but use both with a sense of skepticism wrapped in risk management? Seems to produce the most consistent results to me…and reduces the number of head-scratching risk events which are depressing to go through.
If I’m able to read this Market based on how I’ve seen it act in the past, I think we’ll now enter a period of “relative calm” punctuated by a choppy, grinding rally higher…..accompanied by rose-colored punditry that “the correction is over and the bull is back.” I don’t have a particular *bias* per se, it’s just that there are many charts that have monthly and weekly downtrends and those do not reverse on a dime. The only wild card here is (once again) central bank policy which might go “Full Argentina” in search of achieving desired levels of monetary velocity. If that occurs, then all bets are off and I’ll just be selling put spreads and buying call options for the next two years until the resulting mess collapses.
Please note that I’m starting my APR cycle offense, detailed below.
I did a case study on what Bernie Sanders’ “college for all” plan would do to the retail trader. I have also reviewed Hillary Clinton’s proposed “tax the traders” plan and it does not target the retail trader, only those institutions employing HFT. I am going to keep this posted here as a “sticky” for a while until everyone’s had a chance to review the plan and educate themselves on the impact. I’m not trying to tell anyone how to vote or for whom to vote for, I just want you to understand the impact of the proposed policies to active traders.
Offensive Actions
Offensive Actions for the next trading day:
- The Market has shown its hand for 2016 and the path of least resistance is “down.” This will affect how we create edge going forward; we will look to focus on call spreads above the range, and then be patient enough to sell into the fear when it arrives.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and then added SPY 206/208 call spreads to somewhat “complete” the Iron Condor for the MAR cycle. Please see the HP Iron Condors tab below for more discussion.
- I added short calls to “cover” my shares on the SLV; please see the “stock” section below for more discussion.
- I will enter APR SSO Cash-Secured puts on Monday morning; please see the “Stocks” tab below for more information.
- Please see the “HP Condor” section below for initial HP Iron Condor position entries for APR.
Defensive Actions
Defensive actions for the next trading day:
- We have just seen the SPX and the DOW go through a second major correction separated by only three months; we need to be on guard for a long duration of heavy “realized” volatility up and down through the rest of this year.
- The MAR SPY spreads are a huge distance OTM, and my debit spreads are risk-managed from day one. The cash-secured put positions are doing exactly what I want them to do. We really don’t have much else at risk right now and that will change soon as we place positions at risk for the APR cycle..
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
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Technical Analysis Section
Market Internals: Volume was below average Friday. Breadth was mixed-to-weak with 195 S&P advancing issues vs 209 declining.
SPX Market Timer : The Intermediate line rose above the Lower Reversal Zone, now showing a Bullish Bias. No leading signals at this time.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term uptrend. The RUT is in a long-term downtrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate downtrend and short-term uptrend.
VIX: The VIX fell 5.13% to 20.53, inside the bollinger bands. The VIX ratio is 1.13 and still above the mean. The RVX dropped 5.98% to 24.53 and is inside the bollinger bands.
Fibonacci Retracements: We are still tracking the Fib Retracements of the main swing lower from the 2080 level down to about 1812; the last overhead target is the 61.8% Fib retracement at about SPX 1979. The 38.2 fib is at 1915, and the 50% fib is at SPX 1947 which is where resistance came in on the last swing up.
Support/Resistance: For the SPX, support is at 1810 and 1800 … with overhead resistance at about 1950, 2000 and 2080. The RUT has support at RUT 872 and 958 with overhead resistance at 1100. The RUT, SPX, and DJI charts are now all showing a “Death Cross” with the 50ma below the 200ma.
Fractal Energies: The major timeframe (Monthly) is super-charged again with a reading of 64. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 47, and is starting to recharge due to recent chop. The Daily chart is showing a level of 47 now which was fully recharged from all of the non-linear price behavior and ready to trend again. The Intraday chart is just going to follow the higher-timeframe energies at this point, however it is doing precisely what we expected to restore energy. The market has the potential for another large move right now.
Other Technicals: The SPX Stochastics indicator rose to 81, overbought. The RUT Stochastics indicator rose to 70, below overbought. The SPX 5/34/5 MACD histograms fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1833 and resistance at the upper band at 1954 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 954 to 1039 and price is below the upper band.
At this point index charts are one-by-one falling into a Bear Market, so it’s now much less of a mystery as to what we’ll see occur in 2016. Even if the SPX and DJI avoid becoming a true “bear,” we will still see very volatile, difficult price action for likely the remainder of 2016. The price has now re-tested the January lows on the SPX, and now looks to be playing out as expected into a rising wedge pattern, although this has not been confirmed yet. The energy is there for this to happen. We also have to consider the possibility of a very strong rally to the upside.
I had the following trades in place for the FEB 2016 Options cycle:
Position Management – NonDirectional Trades
Here are the current positions in play with 19 trading days remaining in the MAR cycle:
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.03.
- SPY MAR 153/155 Bull Put Spread (1/20) was entered as a rollout entry from the FEB SPY trade for a $.16 credit with a 2x sized position. This position is currently showing a negotiated exit of $.02.
- SPY MAR 206/208 Bear Call Spread (2/2) was entered for a $.15 credit with a half-sized position. The current negotiated debit exit is $10.
Defense: I will play the current positions by Static Risk Management. The SPY MAR series has a tremendous amount of room to work with, an effective 470 point wide iron condor. .
Offense: We are finished with MAR cycle offense and it’s time to start APR offense with 39 trading days remaining. I could be incredibly misguided, but I believe that the “bottom” is in for at least a month, and we need to immediately set up SPY bull put spreads for the APR cycle. I will set up my cornerstone position at the deepest strike pair that will secure me at least a $.15 credit on a $2-wide SPY bull put spread for the APR cycle. Aftermarket I show that the first possible spread would be the APR 166/168 bull put spread, but of course that will all depend on how the market gaps to open trading on Monday. As soon as we secure this bull put spread for APR, I’ll try to remain patient for a few days to see if the price want to rally a little higher to January resistance and sell the matching bear call spread.
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” or “volatile/trending” which creates difficult conditions when the realized vol outraces the implied vol. I think that these are more appropriate conditions for the HP Iron Condor, however we might get a shot here soon if the price approaches the SPY 200 level; I think we would see at least a short-term consolidation under that level.
Waiting until the market character rotates back to “quiet/trending” before playing this strategy again. This is a “long vega” strategy which works best in quiet, low-IV markets. (not what we currently have) I am also working on a Diagonal Spread strategy that we can play in a Bearish market, and I hope to have that released to this newsletter shortly. My goal is to see if we can play off of the SPY 200 level with zero downside risk.
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 25 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 sold the SLV MAR 15.5 calls for $.23 on 2/8. I do not want to let this position be assigned, so I would roll those calls to APR if necessary.
- SSO -I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.35. I will not “defend” this position since I am OK with assignment, but I will let the price dictate how we address it going forward . Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric. I would like to enter the APR cycle on Monday morning; I will enter the SSO APR 48 puts, and will do so on Monday morning as long as I can secure at least a $.75 credit for them once that series is printed and starts trading.
Nothing planned for right now; please see my comments above on the SLV position.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – This signal is about to cross to the upside, however I already have a SPY swing trade in place with the SPY MAR 200/201 debit spread.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma. This signal was showing last week but I will not attempt to use it.
- Squeeze/60 Minute – The beginnings of a squeeze showed on Friday afternoon.
- 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.
At this point we need to find our next “edge” to trade against; this will likely not happen until we have the next “higher low” and next “higher high” set up so that we can start to identify the trading range to position again.
No setups currently in play.
I have no positions at the current time. We are looking for the price to bounce to higher levels so that we can become more aggressive with bearish spread strategies, similar to the Bear Put Spread that we closed recently:
Waiting on the next setup…. .
I have the following positions in play:
- MAR UUP 26/27 long call spread (2/1) entered for $.17 debit, will hold seeking 100% return on capital.
- SPY MAR 200/201 long call spread (2/17) entered for $.20 debit, seeking 100% return at $.46 credit.
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.
On 1/19 I added MAR-cycle financing trades. I will look to enter the next cycle of long puts once we see a little more upside and we see the VIX drop into the sweet spot. I would be looking at MAY 2016 puts at this point and factoring in a 10% drop. Right now we are still looking at about a $3 put option with the MAY SPY 173 puts, which is pretty expensive. We will create more value if we’re just a little more patient and let the VIX come down closer to the “mean” at the 200dma. .
We currently have the following positions in play with this strategy:
- MAR SPY 158/160 Bull Put Spread financing trade – I entered this position (1/19) for a $.15 credit with a 12 contract position to help finance a future long put position.