February 27, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
View Doc's New Book
March Expiration
Day(s)
:
Hour(s)
:
Minute(s)
:
Second(s)
View Doc's Options Programs
I’ve been working in one way or another for the past forty years. During this time I’ve seen some really amazing shifts in how things get done. When I was younger, there was an inbred reverence to “how things were done.” If you wanted to know how something was done the right way, you consulted “the book.” This is, of course, a figurative term, as “the book” could have been a technical manual, religious scripture, or just a book written by a well-known and respected expert. An example of this would be “The Common Sense Book of Baby and Child Care” written by Benjamin Spock in 1946. Millions of babies were reared according to Spock. Society had a certain order as everyone followed “the book” in whatever they did, as there was “the book” for everything that you involved yourself in.
But as we sit here in 2016, I see that tumbling down in disarray everywhere. Find something in your life that you feel “certain” about, other than the sun coming up tomorrow morning. The influence of the Internet has produced “disruptive” innovation and effects everywhere you look. The effects of this have now entered the overall Market as we’re seeing things that “aren’t normal” in how we manage risk in this environment. An example of this is how we normally predict recessions; we might find that the “old tools” or “the book” that we depended on for so many years no longer matches what we see going forward.
What’s my point? Don’t get comfortable. If you want to be in this business, your finger needs to be constantly judging the wind, and you head needs to be on a swivel. In a world where governments are increasingly feeling the need to manipulate free markets, no one really understands the unintended consequences of these moves, nor how they will affect the “tools” that we have come to rely on.
One more vote for understanding price action, because no matter WHAT happens going forward, price will always be the ultimate arbiter of value.
I think we’re going to have a period of relative calm over the next few weeks before the next shoe drops. Energy will just continue to build for the next act. .
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 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, and I added another cycle of short SSO puts; please see the “stock” section below for more discussion.
- We now have the SPY APR Iron Condor in play with about 380 points of width at SPY 168/170 on the downside and 208/210 strikes on the upside.
- I’m going to play a short-term SPY Calendar Spread on Monday; see “Time Spreads” section below.
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 look good. If the SPY 200 level does not hold we’ll have to keep our eye on the call spreads but time is moving quickly.
- The cash-secured put positions are doing exactly what I want them to do.
- We got started with our APR HP Iron Condor offense this week. I do not have any defensive actions required right now.
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
%
%
%
Market Internals: Volume was below average Friday. Breadth was mixed with 270 S&P advancing issues vs 226 declining.
SPX Market Timer : The Intermediate line rose above the Lower Reversal Zone, now showing a Bullish Bias. The two strongest timeframes clustered in the Upper Reversal Zone, creating a Strong Bearish Cluster, after Thursday’s Full Bearish Cluster; this is a leading signal for a pause.
DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term uptrend. The RUT is in a long-term downtrend, an intermediate uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.
VIX: The VIX rose 3.66% to 19.81, inside the bollinger bands. The VIX ratio is 1.08 and still above the mean. The RVX dropped 1.56% to 22.70 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 50% fib is at SPX 1947 (which was previous resistance) was punched through this week.
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 65. 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 39 and is flirting with exhaustion after the strong, linear move off of the 1810 low. The Intraday chart is just going to follow the higher-timeframe energies at this point, but it is also exhausted now. The market has the potential for another large move, however we might see a pause in the short term.
Other Technicals: The SPX Stochastics indicator rose to 93, overbought. The RUT Stochastics indicator rose to 98, extremely 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 1832 and resistance at the upper band at 1977 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 952 to 1049 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 similar to the October 2015 moonshot.
Here are the current positions in play with 14 trading days remaining in the MAR cycle, and 34 trading days remaining in the APR cycle::
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.01.
- 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 $.01.
- 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 $07.
- SPY APR 168/170 Bull Put Spread (2/23) was entered for a $.15 credit. The current negotiated debit exit is $.13.
- SPY APR 208/210 Bear Call Spread (2/25) was entered for a $.15 credit. The current negotiated debit exit is $.14.
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.The APR position has an effective width of 380 points; we have increased the wingspan due to effective legging-in .
Offense: We are finished with MAR cycle offense and we just finished APR offense. I’m expecting that volatility will “normalize” in the short run. We’ll likely see realized volatility return before long, which might coincide with our next offensive cycle
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.
While I think the potential for a quick trip up to SPY 200 exists, I think there is also an opportunity that stocks consolidate for about a week at this level, after such a strong move off the bottom. The implied vol levels have normalized and give us a better chance of playing a time spread.
Monday morning I will play a MAR2/APR2 calendar spread on the SPY. As I write this, that would be a 195 put calendar, selling the SPY MAR2 call option, and simultaneously buying the APR2 call. The debit looks to be about $2.45 or so, and I will factor on a max risk of 15% of the debit to size this position.
This is still a “Volatile/Trending” market character, so I’m playing this position as a quick “snatch & grab” before the big vol kicks in again. There is always a high probability that we’ll see the vol kick in before I’m ready, but I’m perfectly willing to accept that and will keep my risk low.
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 $.12. 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 also added the SSO APR 48 puts for a $.95 credit (2/22) and the exit debit is currently $.80.
Nothing to do with the current positions for now.
Thoughts on current swing strategies:
- 8/21 EMA Crossover – This signal has crossed 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 earlier in February but I will not attempt to use it.
- Squeeze/60 Minute – I’m not following this indicator/timeframe in this current market.
- 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. My target would be around the SPY 200 level on an exhausted daily chart, and perhaps also the 200ma overhead:
Waiting on the next setup….
I have the following positions in play:
- AEP APR 67.5/70 Long Call Spread (2/26) Per Thursday’s advisory I entered the AEP APR 67.5/70 long call spread for a $.30 debit.
- T APR 39 Long Calls (2/25) entered for $.12 debit; will hold seeking 100% return on capital.
- UUP MAR 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.
I will likely sell call credit spreads in the APR cycle to help finance subsequent cycles of long puts; I will wait on the price to test the SPY 200 level first.
We currently have the following positions in play with this strategy:
- SPY MAR 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.
- SPY MAY 175 Long Puts – I entered this position (2/23) for a $2.54 debit per Monday’s advisory.