Daily Market Newsletter

October 22, 2016

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Market Commentary

Back in the profitability column for this cycle but nothing to brag about. Earlier in my career I was more of a one-trick pony with options selling, because the market fit that character. I would have one great month after another, and the confidence was there. And then the market changed character, and I was not ready. Coincidentally, it was right when I had “upped” my position size as I felt that I should be more aggressive. The market always knows when you do something foolish like that and it was to be one of the larger lessons for me.

One can go through an entire career working at a job, and once a certainly level of competency is reached, stop learning lessons. Not so with Markets….you must accept the fact that you will continually be humbled at the feet of the Market. And there is no room for complacency; someone else will be there to take your place in an instant.

Something’s gotta give, and it’s going to “give” really soon. Yellen has floated the trial balloon out there about running a “high pressure” economy to stimulate inflation and lower unemployment. This is another way of saying “keep rates low for longer.” I don’t know, has that actually led to inflation in the way that they are measuring? All I know is that they measure no “inflation” however just about everything that I purchase these days (minus gasoline and flat panel TVs) is a lot more expensive….not to mention the ridiculous asset prices of stocks, which were the primary beneficiary of previous QE rounds. We appear to be in another round of less-than-great earnings. The market has been propped up for years on fiat currency and a false narrative…something’s gotta give, and it might happen with the next unexpected risk to hit this country.

And Friday’s internet outage showed how easy that might be….

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Offensive Actions

Offensive Actions for the next trading day:

I’m going to enter a couple of speculative earnings trades on BA Monday morning; see Whale section below.
I’ll add my next Hindenburg long puts on Monday.

Defensive Actions

Defensive actions for the next trading day:

Any vertical 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 higher, but still about average Friday. Breadth was weak with -134 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up above the Lower Reversal Zone, showing a neutral 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 downtrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.

VIX: The VIX fell 2.98% to 13.34, inside the bollinger bands. The RVX fell 3.13% to 17.93 and is back inside the bollinger bands.

Fibonacci Retracements: No retracements in play at this time..

Support/Resistance: For the SPX, support is at 2100 … with overhead resistance near 2200. The RUT has support at RUT 1090 with overhead resistance at about 1300. 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 highly-charged with a reading of 55. The Weekly chart is now fully-charged showing an energy reading of 67, due to the recent chop. The Daily chart is showing a level of 56 which is fully-recharged after the recent drop. We are showing the rare condition of Full Energy again! We should see a relatively large move very soon.

Other Technicals: The SPX Stochastics indicator flattened at 38, below mid-scale. The RUT Stochastics indicator fell to 23, above oversold. The SPX MACD histogram rose slightly below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2124 and resistance at the upper band at 2174 and is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1205 to 1262 and price is above the lower band.

If Central Banks go “all-in” to save each sovereign economy, this will not be sustainable in the long run. We will continue to monitor price action that will show us if the character of the market is moving towards a change in character to a Quiet/Trending Bull again. For now, we’re seeing necessary corrective action come in to “shock-start” markets and volatility again. Markets have become complacent to all of the central bank monetary policy and that’s not a good thing..

I had the following trades in place for the 21OCT 2016 Options cycle:

High Probability Iron Condors

No HP Iron Condors traded during this period

Low Probability Iron Condors

SPX 12OCT 2095/2100*2190/2195 LP Iron Condor – this 2 contract position produced a net $84 profit after commissions or a 17% return on risk.
PX 11NOV 2080/2085*2185/2190 LP Iron Condor – this 2 contract position produced a net $84 profit after commissions or a 17% return on risk..

Time Spreads

QQQ 14OCT/28OCT 118 Put Calendar – This 10 contract position produced a net $5 per contract on this trade after commissions, or just about a 10% return on risk

Cash-Secured Puts/Covered Calls

SLV 21OCT 20.5 covered calls – this produced a $100 net profit after commissions or about a 1% return on capital.

Directional Swing

23SEP GLD 127.5/129.5 Long Call Spread – closed for a $64 net loss after commissions on two contracts. .
23SEP XLB 48/50 Long Call Spread – expired for a full loss of $196 on 2 contracts.
QQQ 11NOV 118/120 debit put spread – closed for a net profit of $41/contract or a 51% return on capital, or net profit of $123 on 3 contracts..

Hindenburg

SPY OCT 194 Long Puts – expired for $153 net loss on 1 contract.

Monthly Performance Commentary A lack of movement is supposed to be an option writer’s paradise but it feels like anything but that right now. What I’ve learned over time (and many losses) is that range contraction like this precedes range expansion, and ALWAYS occurs right when you throw in the towel and can’t stand the waiting any more. Make no mistake, these are treacherous conditions yet they will yield some of the best profits that we can imagine if we can only remain patient enough for the real move.

What We Did Wrong

When a market is as quiet as the one that we’ve seen, profits can come and go very quickly. I was too slow to take profits on my long debit spread positions, such as XLB this cycle..

What We Did Right

We went to bat with a couple of very nice LP Iron Condors in this cycle. We timed them well, placed the strikes at the extremes of the current range, and were out within days. Nice when you can get it.
We did not over-trade.
I believe that avoiding the siren song of quiet volatility will keep out capital safer over time.

What Needs to Be Changed for Next Cycle

Even though I have no particular bias right now, I believe that the risk is to the downside right now..

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: If this dip in price hits the 2050-2100 level on the S&P, we are game on for back month put spreads.

I have the following position:

SPX 11NOV 2080/2085*2185/2190 LP Iron Condor (10/17)- I entered this position for a $2.50 credit, and per my recent advisory I closed this position with limit order for $2.00 debit GTC (10/21). This created a 16.8% return in the space of 5 days.

I don’t want to go back to the well with another position until “the move” shows up, whenever that is.

I have no time spreads at the current time. My preference is to take these on DAILY exhaustion and not WEEKLY exhaustion signals, since the weekly exhaustion creates unwanted price volatility. Similar to the LP Condors above, I will likely have to expand my view to include equity candidates that are showing a likely short-term consolidation. This is never my first choice due to the additional variables that we encounter.

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 wrote 21OCT 20.5 calls (9/7) against half of my position for a $.21 credit, which expired on Friday. I will look to sell more calls in the next bounce higher in SLV.
SSO – Waiting for the next pullback to sell puts against the SSO, preferably at the 50 level or lower. .

Nothing to do at this time with current positions.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -I entered the 8/21 ema long setup (10/5) with an ATM SPY vertical spread, using the 26OCT 216/218 call spread, paying $1.12 debit. I will look for about a 50% return from this trade.
RSI(2) CounterTrend – Looking for the next signal.
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.

I have the following positions in play:

QQQ 11NOV 116/118 debit put spread (10/17) – I entered this trade by buying the 118 put and simultaneously selling the 116 put, for an .84 debit, and I will look for about a 50% return from this trade.

I like how BA is set up, however there are earnings on the horizon. We could play this a couple of ways. If we think that there might be an upside “pop” on their release on the 26th, we can either play ITM or ATM. The EM to this Friday is about 4.9 points, or a target of just over $140/share. I could buy the BA 28OCT 140/141 for about $.20 a contract, which might produce more than a 100% return should the price pop higher, or we could do the ATM BA 28OCT135/136 for a lower expected return yet easier management should we not get a big pop. I think I will play both of these on Monday morning in lieu of the boredom from this market.

I will adjust strikes if there is a gap on Monday.

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.

To remove the current series of puts, I will look for a move down to and below the SPX 2100 level.

I never got the upside “burst” to allow me to sell call spreads above SPY 230 that I wanted; now I can concentrate on selling put spreads at some level below SPY 200.

I will add the next series of Puts on Monday morning; I will target the 20JAN17 SPY 193 puts, which are currently going for about $1.54

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

SPY NOV 197 Long Puts – I entered this position (8/22) for a $1.56 debit.