Daily Market Newsletter

April 22, 2017

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Market Commentary

Another profitable monthly cycle! That’s 8 in a row since August 2016, and 120 out of the last 139 cycles we’ve covered in this newsletter.

What has changed during that time? We’ve had one full bear market, several corrections, one cyclical bull, one secular bull, and a whole lotta central bank policy in the middle. There are many things that I “miss” about the market from 2005 when I started this gig, such as the amount of premium available to sell, and the overall liquidity of the markets that we traded. Sure, there are more optionable stocks to trade now, but just because options are listed doesn’t mean that it’s a good choice. We had many of the same issues back then, such as an ever-rising market with questionable fundamentals….same thing, different year. The biggest change by far is this complacency that is killing the premium-selling part of our business. So….we adapt, improvise, and overcome. We are generally net BUYERS of premium now.

In today’s video I’ll go over the various sectors of the S&P, and what I see coming next for 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’ll set up a SPY Calendar Spread on Monday morning; see “time spreads” 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.

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 slightly above average Friday. Breadth was poor with -167 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up below the Upper 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 uptrend, and a short-term uptrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX rose 3.39% to 14.63, back inside the bollinger bands. The RVX gained .89% to 18.18 and is back inside the bollinger bands.

Fibonacci Retracements: The SPX has come down to the 23.6% Fib Retracement of the entire November-March rally.

Support/Resistance: For the SPX, support is at 2320 … with overhead resistance at about 2400. The RUT has support at RUT 1335 with overhead resistance at about 1415. 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 36. The Weekly chart is now just above technical exhaustion with an energy reading of 46, due to the recent chop. The Daily chart is showing a level of 60 which is now recharged. Charts are doing precisely what they need to do to work off the enormous move off of the election bottom.

Other Technicals: The SPX Stochastics indicator fell to 38, mid-scale. The RUT Stochastics indicator rose to 47. mid-scale. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2333 and resistance at the upper band at 2371 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1346 to 1388 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 21APR 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

SPX 24APR 2285/2290*2375/2380 LP Iron Condor was closed for a $42/contract profit on 5 contracts, or a 16.8% return on risk.
SPY 21APR 238/239 vertical hedge expired for $46 loss.
AMGN 24MAR 167.5/170*180/182.5 Iron Condor was closed for $5/contract profit on 5 contracts.

Time Spreads

ABBV 31MAR/7APR 64.5/66.5 Call Diagonal was closed for a net profit of $22/contract on 5 contracts, or a 21% return on risk.

Cash-Secured Puts/Covered Calls

AMD APR $11 puts sold for $.19 credit expired for $360 total profit on 20 contracts.

Expected-Move or “Whale” Trades

BIDU APR17 190/195 Debit Call Spread remaining two contracts expired for net $200 loss.
VLO 31MAR 67.5/69.5 Debit Call Spread expired OTM for a net $102 loss on one contract.
CRM 21APR 79/80 Put Spread gave me a net profit on the trade of $9/contract on five contracts, or a 45% return on capital.
KO 5MAY 42/44 debit call spread was closed for a $39/contract profit on five contracts, or a 44.8% return on capital.

Swing Trades

RSI(2) XLF 7APR 23/24 call debit spread gave me a $19/contract profit on five contracts, or a 38% return.
RSI(2) XLF 7APR 23 long calls gave me a net profit of $19/contract profit on five contracts, or a 31% return
RSI(2) MAR 13APR 91/92 debit call spreads gave me a net $21 profit per contract on five contracts, or a 42% return on capital..

Hindenburg Positions

SPY APR17 206 Long Puts were entered for a $.92 debit and expired OTM for a net $93 loss after commissions..

Earnings Trades

JPM 13APR 85/86 call spreads gave me a net $21 profit per contract on 5 contracts, or a 42% return on capital.
VZ 21APR 48.5/49.5 put spreads gave me a net profit after commissions of $20/contract on 5 contracts, or a 41.7% return on capital.

Lessons Learned from this cycle:
During this cycle we finally saw some cessation to the monster election rally from 2016….almost five straight months of uninterrupted gains that saw the SPX tack on 317 points and just about 15% of gains, we’ve started to see the price move into consolidation mode. During a corrective price move like this, “good news” becomes a reason to sell but we’re not seeing “bad news” create massive selling pressure….this huge floating bid under the market is seeing to that.So….as long as this lasts, the strategies that are going to work are non-directional options strategies as well as very short-term swing trades. I believe that this market will eventually break out to the upside again, even if it creates a “lower high” in the short term.

The results of this cycle pretty much went par for the course to those conclusions. .

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 no positions at this time. While I do think that we have a small window of opportunity to play LP Condors yet in this environment, the energy is quickly building up in most markets that we follow and my preference is that we wait on a short-term exhaustion signal to fire before we risk capital based on a hunch.No entries at this time..

I have no positions at this time.

Even though I don’t have a technical signal for it, I’m going to set up a SPY 19MAY/16JUN 234 put calendar on Monday. If the price gaps up on Monday morning I’ll change to the 235 strike. I’ll discuss management of this trade in today’s video.

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 sold 19MAY $18 calls (3/27) against this position for a $.22 credit.
RIG I’m going to add more puts once we determine that the ” range” is printed on US markets. .
X – I added the 19MAY $25 puts (3/13) for $.37 credit. This stock is getting hammered but we had an excellent entry on it and it’s likely to bounce before assignment. If the price drops lower i might consider selling JUN puts too, perhaps at the $20 level.
AMD – I sold 19MAY $10 puts (3/27) for a $.25 credit.
NVDA – I sold the 19MAY $80 puts (3/13) for $.90 credit.
XLF – I sold the 16JUN $22 puts (4/10) for $.25 credit and will accept assignment if the price pulls back.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – The 8/21 ema is starting to cross over to the downside now. I am taking the QQQ put spread on this signal .
RSI(2) CounterTrend – I will look for more RSI(2) trades in the near future.
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 set up a BEARISH earnings trade on VZ (4/19) , entering the VZ 21APR 48.5/49.5 put spread for $.48 debit, and the position was closed on my GTC credit order of $.72. This gave me a net profit after commissions of $20/contract, or a 41.7% return on capital.

We’ll look for more earnings trades this week.

I have the following positions:

QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit. Still need more downside movement to light these up.
QQQ 28APR 130/132 debit put spread (3/28) was entered for $.85 debit. I will look for a 50% return on my position, or a $1.28 GTC credit.

I have the following positions:

TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
MSFT 5MAY 68.5/69.5 debit call spread (4/3) was entered for a $.21 debit. I might be closing this trade shortly since it has broken out.
KO 5MAY 42/44 debit call spread (4/5) was entered for an $.85 debit and closed on Friday for my $1.28 GTC credit limit.

I see a bunch of potential entries right now that require a breakout; I’ll talk more about them in the weekend report..

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

I will likely clear all put options if the price drops 5% from the recent highs at SPX 2400. Not sure that I can expect much more than that given the current climate.

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.