Daily Market Newsletter

March 18, 2017

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Market Commentary

Another profitable month…..that’s 119 out of the last 138 monthly cycles, however challenges lay ahead as I outlined in my March Cycle performance summary below. The Options SKEW is about has high as we’ve ever seen it, certainly over the last twenty years which really defines the “modern market,” and is making our job very difficult to trade this market using the strategies that make sense with this character.

In this weekend’s video, I’ll cover the current character as well as what “SKEW” is and how it impacts us.

If the video above does not play, please try this version of the video with embedded player.

Offensive Actions

Offensive Actions for the next trading day:

I have a short call diagonal entry defined for ABBV; see “time spreads” section below.
AT&T might be breaking out; see “whale trades” section 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.
I need to watch for an exit on AMGN’s LP Condor this week.

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 about average Friday. Breadth was mixed with +49 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, now showing a bullish bias. This chart is once again very close to showing a Full Bearish Cluster, however that possibility faded somewhat on Friday.

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

VIX: The VIX gained .62% to 11.28, inside the bollinger bands. The RVX fell 3.42% to 14.14 and is back outside the bollinger bands.

Fibonacci Retracements: Fibs 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 now into exhaustion with a reading of 29. The Weekly chart is now technically exhausted with an energy reading of 36, due to the recent breakout. The Daily chart is showing a level of 56 which is recovering quickly. It’s rare when we have all three major timeframes in exhaustion as we had for two weeks.

Other Technicals: The SPX Stochastics indicator flattened at 45, mid-scale. The RUT Stochastics indicator flattened at 24. above oversold. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2352 and resistance at the upper band at 2392 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1355 to 1419 and price is below 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, but a pullback to stoke up the negativity and move into a larger trading range would be a good thing to see first.

I had the following results for the 17MAR 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

SPX 10MAR 2315/2320*2370/2375 achieved a break-even exit on this position.
RUT 24MAR 1360/1365*1425/1430 Iron Condor closed for a net $160 profit after commissions on five contracts, or a 12.8% return on risk.
AAPL 3MAR 129/131*135/137 Iron Condor was closed for a $226 loss on 2 contracts.

Time Spreads

SPY 24MAR/21APR 237 Put Calendar gave me a net profit of $14/contract or $140 on ten contracts, which was a 10% return on capital.
SPY 17MAR/21APR 235/241 Double Calendar gave me a net profit of $20/contract or $200 on ten contracts, which was an 8% return on capital.
AAPL 24FEB/3MAR 131/133 Short Call Diagonal gave me a net $72/contract loss on this position with one contract .

Cash-Secured Puts/Covered Calls

RIG $12 MAR17 puts added for $.19 credit expired OTM for a $180 net profit on ten contracts.
X MAR17 $25 puts added for $.47 credit expired OTM for a $368 net profit after commissions on 8 contracts.

Expected-Move or “Whale” Trades

DIA 10MAR 199/201 Debit Put Spread expired OTM for a net $192 loss on two contracts.
XLU 10MAR 48.5/50.5 Call Vertical gave me a net profit after commissions of $47/contract or $94 on two contracts, or a 47% return on capital. .
TIF 31MAR 81/83 Call Vertical gave me a net $50/contract profit after commissions, or $100 on two contracts for a 52% return on capital.

Hindenburg Positions

SPY MAR17 203 Long Puts were entered for a $1.07 debit and expired OTM for a net $108 loss after commissions..

Earnings Trades

None this period

Lessons Learned from this cycle:
This cycle started off with a continuation of the incredible rally that we’ve seen since the November election, yet it finally has pulled into somewhat of a consolidation zone since the latter part of February. We went with mostly non-directional trades this cycle and for the most part it paid off, although we certainly took some early heat with them.

I think that we will continue to look for range-bound trades in this particular market, since the path of least resistance appears to be “sideways” for now, with all of the expected “good news” pretty much priced in.

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.

If I see price drop to the SPX 2300 level, this might be our first opportunity to sell premium against that level.

I have the following positions:

AMGN 24MAR 167.5/170*180/182.5 Iron Condor (2/24) was entered for a $1.27 credit. I’m going to shoot for a $1 debit exit GTC. The price fell to the bottom of the range but is holding. I want to look for any opportunity to make a 5%-or-better profit from this trade.

I would like to see a little more vol come into the chains first before adding more positions .

I have no positions at this time:

I would love to put on a SPY APR/MAY calendar spread but the vol differential is poor.

ORCL is showing a potential short call diagonal setup but my preference would be for the price to try to claw higher first before entry.

I will set up a small position with an ABBV 31MAR/7APR 64/66 short call diagonal, or whatever $2-wide spread combination allows me to set up a trade with about a $1 credit on Monday morning. I will look for a 50% return on risk for the trade.

. The calendar spread tracking sheet is available for your download here. Yes, if you follow the math in the sheet, all of the numbers account for commissions in and out of the trade. 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. I will look for the next daily exhaustion signal to sell further OTM calls against this position.
TWTR I will look for the next cycle of puts to sell against TWTR. .
RIG I’d like to see if I can secure lower, deeper puts.
X – I added the 19MAY $25 puts (3/13) for $.37 credit.
AMD – I sold the APR $11 puts (2/27) on AMD for $.19 credit.
NVDA – I sold the 19MAY $80 puts (3/13) for $.90 credit.

If we get more of a pullback then I can be a little more aggressive with this strategy.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover, however it will be to the downside, and the first downside crossover is usually a poor signal. .
RSI(2) CounterTrend – I’ll look for more of these in the near future as a new range approaches.
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.

I have no positions at this time. The next earnings season will begin in April.

I have the following positions:

QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit.

I have the following positions:

BIDU APR17 190/195 Debit Call Spread (1/30) entered for a $.98 debit.Understand that I do not have a “stop” in this trade. I closed down half of the contracts (2/17)for a $1.82 credit, or a net profit of $80/contract. I will hold the rest of the contracts longer-term and wait on the breakout.
TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
VLO 31MAR 67.5/69.5 Debit Call Spread (2/28) was entered for a $1.00 debit. I will look for a 50% gain from this position. Currently this trade is profitable but it needs to move soon.

I like AT&T for a Whale setup right now, there is the risk that the overall market will not support higher prices right now. If I see T break above the $42.70 level I’ll add a 21APR T 42/44 call spread or whatever the appropriate strike pair is that gets me into the debit spread for about a dollar.

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.

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

Per Thursday’s report I added the JUN17 long puts. I can’t think of a better market condition to be adding long puts. I very much doubt that we’ll see a full 10% or larger haircut, however we’ll be in position at the right time.

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

SPY JUN17 215 long puts – I entered this position (3/17) for a $1.19 debit.
SPY APR17 206 long puts – I entered this position (1/27) for a $.92 debit.