Trading Scoreboard - December 30 2010

 

Defensive Game Plan:  We have the full January HP Iron Condor in place with credit spread positions at SPY 102/104 and SPY 130/132, and active hedge positions at SPY 127/129/131 and SPY 102, as well as a Synthetic Long hedge at SPY 122/122. Action is required on these positions if we see the price go  higher in the S&P's and our Risk Threshold is breached again. We have trimmed 25% of our upside risk by closing down part of the Call Spreads for break-even, and will look to trim another 25% should we see another dip.

I now have a February HP Bear Call spread in place at SPY 134/136; nothing to defend at this point.  

I have January Low Probability Condor positions at XSP 118/120*126/128 strikes with a Long hedge trade at XSP 124/126 which will help us should we see additional upside price movement through the cycle. 

 

Offensive Game Plan:  We are done with January options offense pending further adjustment trades. February offense has begun this week by selling into strength. We might not see any weakness show up until mid-January based on the POMO schedule and weakness in the dollar; I will start February put spreads tomorrow with a smaller position.

 

 Condor Market Conditions:  Yellow Light. Markets have powered above the prior November swing high, and appear to be in the next Weekly swing higher although we're seeing some serious divergences in market internals. Price is consolidating yet again.

 

No daily video today; please check back on Saturday with the OptionsLinebacker Weekend Edition. 

 

Update: The SPX fell .15% or 1.88 points today to finish at 1257.90.... the Russell 2000 index dropped .06%, or .51 points to finish at 789.75, and the Dow moved lower by .14% or 15.67 points to finish at 11569.71. Volume was still very low, with poor breadth.

What are the technical indicators telling us?

SPX Market Timer:  The Intermediate line flattened in the Upper Reversal Zone, showing a Bullish Bias. The Near Term and Momentum lines fell below Upper Reversal zone after Tuesday's Full Bearish Cluster. The Near Term line is also showing Bearish Divergence. View the chart.

DOW Theory: The SPX, RUT, and DJI are in long, intermediate, and short term uptrends. We have an uptrend in the Weekly charts with a higher high and a higher low, and same primary uptrend pattern in the Daily charts as well. 

VIX: The VIX rose 1.50% today to close at 17.54, inside the Bollinger Bands. The VIX ratio is .76 and is below its statistical mean. The RVX (volatility index for the RUT) rose 1.25% today to finish at 23.42, and is inside the Bollinger Bands. We are seeing a small reaction in the vix, something to watch for now. The VIX Bollinger Bands are also starting to contract again. 

Fibonacci Retracements/Projections: No fibs in play just yet. 

Support/Resistance: For the SPX, support is around 1173  ... and resistance is at 1300. The RUT has support around 680 and overhead resistance at 800. All charts are now above their 50 and 200dma's and the Dow, RUT, and SPX charts have crossed to the upside again.

ADX(13): The SPX ADX rose to 28.53, picking up the recent uptrend. View the chart. The RUT ADX rose to 43.74, and the DJI rose to 26.83. Charts are now showing the beginning of a trend, and the RUT is now showing a very strong trend. Big moves come as the ADX rises from below the 20 level. Keep in mind that  most trends flame out in the upper 30's on this indicator; the RUT is above 40. 

Other Technicals: The SPX Stochastics indicator dropped to 92, overbought. The RUT Stochastics indicator flattened at 88, overbought. The SPX and RUT 5/34/5 MACD histograms fell below the signal line, showing waning momentum with defined Bearish Divergences. The SPX is inside the Bollinger Bands with Bollinger Band support at 1216 and resistance at the upper band at 1269 and price below the Upper band. The RUT is inside the Bollinger Bands, with its boundaries at 751 to 801 and price below the upper band. The Bollinger Bands are starting to contract, showing that charts are in the next consolidation phase, building up energy for the next move.

The SPX, DJI, and RUT charts are showing that markets are moving into a parabolic uptrend....however market breadth is waning which is Bearish in the short term. Price always wins in this contest, but breaks can be very fast. I expect that any eventual dip will be bought relatively quickly.

Summary:  Another day of poor volume and anemic market internals, yet the charts are doing exactly what they need to do to hold their gains into the new year. Over the past couple of days I've been saying that the charts will probably go higher than people expect, then scare everyone half to death by going lower. What if they don't go lower?

 

I have to factor that into my plan as a possibility; the Dollar index continued to sell down today which is going to equate to continued strength in equities. The S&P daily chart is doing exactly what it needs to do in the short term to consolidate and store energy for the next move higher. The Bollinger Bands are squeezing once again. Every technician on the planet has an all-knowing vision that the markets will sell off hard in January. Sure, that's the logical approach, but the chart just continues to climb the wall of worry on the backs of the Fed. 

 

Because of the likelihood of continued momentum, I'm going to open a small hedging position in the February Bull Put spreads. It will not completely hedge the Bear Call spreads from February, but that's fine. I just need to get *something* in play should we not see the expected retracement for longer than we expect. If we do get a big retracement, then I can always establish much deeper put spreads with a larger position. 

 

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The SPX chart is available here.

The Russell 2000 chart is available here.

The Dow chart is available here.

In all charts, the vertical dark green line represents the January expiration date. The horizontal pink lines represents our January spread positions at SPY 102/104 and SPY 130/132, and our February spread position at SPY 134/136. The Blue Pyramid is our Butterfly at SPY 127/129/131. 

January High Probability Iron Condor Trades: There are 15 trading days left in the January expiration cycle. I have the following positions in play for the January options cycle:

 

Position Points OTM

Probability 

of Success

Sold Strike Delta Natural Credit Natural Debit Negotiated Exit Max Gross Debit
 
SPY 102/104 Bull Put Spread 21.72 98.69% .01 .00 .02 .02 .61
SPY 130/132 Bear Call Spread 4.28 86.09% .15 .18 .20 .19 .62
SPY 127/129/131 Butterfly 3.28 20.65% .22 .32 .39 .35 n/a
SPY 102 Vega Hedge Puts 23.72 .88% .01 .02 .03 .02 n/a
SPY 122/122 Long Delta Hedge 3.72 n/a .23 3.81 3.86 3.83 n/a

 

Here are the current positions entered during this cycle:

  • The SPY 102/104 Bull Put Spread (entered 11/29) received a credit of $.16 with 40 contracts, or roughly 5% of my account equity. This trade brought in an initial credit of $621 after commissions.
  • The SPY 130/132 Bear Call Spread (entered 12/2) received a credit of $.17 with 40 contracts, or roughly 5% of my account equity. This trade brought in an initial credit of $661 after commissions. I closed down 10 contracts of this position (12/16) for a $.16 debit.
  • The SPY 127/129/131 Call Butterfly Spread (entered 12/6) cost a debit of $.19 with 3/-6/3 contracts, or a net cost of $69 with commissions.
  • The SPY 102 Vega Hedge Long Puts (entered 12/6) cost a debit of $.15 with 2 contracts, or a net cost of $32.
  • The SPY 122/122 Long Synthetic Hedge (entered 12/22) cost a debit of $3.63 with 1 contracts, or a net cost of $365.

 

Defense: This position is currently showing a Delta value of -126, meaning that the next point that the SPY moves higher will remove $126 of value from the position. Gamma is -87, which means that the Delta value will then read -213 after that point move. Theta is +33 meaning that the position is burning $33/day of time value, and Vega is -112, which means that the position will gain $112 of value if Implied Volatility drops by 1%. The greeks are showing that the position is within our risk limits at this point; my Delta threshold is +300 and -250. 

 

With the addition of the Synthetic Long trade, I have now somewhat hedged the position against a continued move to the upside. My analyzer shows that we'll have to add another long hedge if the price rises to the SPX 1270 level in the near future. If the price falls from here, then I can stay in the Long Hedge until that position loses $250 outright, which would be a 25 point drop in the SPX down to about the 1234 level. By that point we wouldn't need the long hedge anymore and would likely consider options to close the rest of the call spreads down for a profit. 

 

I would still like to trim my upside risk should the price drop at all this week...enough time value has burned off...and the VIX is low enough....so that if we see a quick pullback in the morning, we'll be able to secure that $.17 limit buy on our call spreads. If the price continues to stay at this level into early next week, we might consider a full close on the entire call spread position but leave the Butterfly. There will be a lot of gamma risk popping up soon and I do not want to take the risk of having a nicely profitable trade turn into a potential loser. 

 

The Butterfly trade is starting to gain some value and the attack is dragging out long enough that it very well provide us with some value by expiration week. If we do have an opportunity to close our call spreads early for a profit, I will likely just keep the Butterfly hedge to see if the price will wander higher into it. The Long Synthetic Hedge is also gaining value nicely and helping keep down the heat of a continued move higher. 

 

A very viable overall exit is available for the entire position for about 60% of potential profits if you just don't want to have to maintain a position against this year-end "ramp" and fight the Fed's POMO schedule. If you don't have the attention/time/stomach for it, then there is absolutely no shame in getting out and waiting for the end of this parabolic move to finish so that you can sell into it with a better edge. I will stand in there and duke it out so that you can see how I defend a position against this type of move. I really believe that most folks playing cash positions should opt for this move because we're in the middle of another strong Weekly impulse swing and there's no telling how far it will go. It has already exceeded my expectations. 

 

Offense: We now have the full Iron Condor in play at this point; January offense is finished pending any adjustment trades. 

 

I have the following open orders for this cycle:

  • SPY 124/124 Synthetic Long - should my Deltas rise above -250 again, I will add the SPY 124/124 Synthetic Long by buying a January 124 Call and selling a January 124 put.
  • SPY 130/132 Bear Call Spreads - I will close down another 25% of my call spread position should I be able to secure a break-even exit on this position via a $.17 or better debit limit order.

February High Probability Iron Condor Trades: There are 35 trading days until February expiration; I have the follow positions in play for this cycle: 

 

Position Points OTM

Probability 

of Success

Sold Strike Delta Natural Credit Natural Debit Negotiated Exit Max Gross Debit
 
SPY 134/136 Bear Call Spread 8.28 90.10% .11 .14 .18 .17 .61

 

Here are the current positions entered during this cycle:

  • The SPY 134/136 Bear Call Spread (entered 12/27) received a credit of $.16 with 40 contracts, or roughly 5% of my account equity. This trade brought in an initial credit of $621 after commissions.

 

Defense: This position is currently showing a Delta value of -179, meaning that the next point that the SPY moves higher will remove $179 of value from the position. Gamma is -38, which means that the Delta value will then read -217 after that point move. Theta is +15 meaning that the position is burning $15/day of time value, and Vega is -115, which means that the position will gain $115 with a 1% drop in implied volatility. My Delta Threshold for the call spreads is about -300, so I would prefer to get my put spreads in play before the Delta Risk gets to that level.

 

The best Defense for the call spreads is to secure a matching put spread to reduce our risk. Per the discussion points above I feel that I do need to get at least a small position in play to help defend the call spreads against a continued grind higher while the Fed continues to inject funds. The current put spread for February that will secure us at least a $.15 credit is the SPY 113/115 bull put spread. If we see a morning gap lower, I will remove the order and try for a deeper strike, such as the SPY 112/114 bull put spread. 

 

I will continue to look for a deeper pullback so we can put a larger core of our bullish position well below major support levels such as SPX 1130. 

 

Offense: Per the comments above I will attempt to secure a bull put spread tomorrow at the open. 

 

I have the following open orders for this cycle:

  • SPY 113/115 Bull Put Spread: I will submit this order GTC for a limit of $.15 credit or better, using 3% of my trading capital. Each contract will require $200 of maintenance to STO the 115 put, and BTO the 113 put.

Low Probability "Delta Neutral" Iron Condor Trades -  We have the following Greeks showing in our current positions:

 

Delta

Gamma

Theta

Vega

-23.02

-10.79

+5.16

-15.81

 

Here are the current/closed positions entered during this cycle:

  • XSP January 118/120*126/128 Iron Condor: this position was entered on 12/9 with 4 contracts and received a $1.00 credit, bringing in a net credit of $384 after commissions.
  • XSP January 124/126 Bull Call Spread: I entered this position (12/20) for a $1.10 debit with 2 contracts.

 

The Delta Risk for our January position is below my threshold of -34 after adding the hedge trade so no action is required, and I will not add any further upside hedge positions to the mix. At this point with the call spread hedge in place, I am actually hoping that the price continues to rise and crush the IV out of the chain, as that will help us to be able to take early profits on any kind of mean-reverting pullback. 

 

I have no open positions. The February cycle will start during the first week of January. I will start using 8 contracts during that cycle, which is a 2% max-risk trade based on a $40k account. 

 

We play these "Delta Neutral" trades with no real regard to the charts, only focusing on the Options Greeks and beginning each trade with a 1:1 risk/reward position. Positions are adjusted once we reach a Delta Threshold. These are more advanced trades than the "High Probability" Iron Condors and require better online brokers and more nimble entry/exit skills. Not recommended for options beginners but all are welcome to play along with sim accounts. 

Stock Trades (Selling Puts/Covered Calls/Collars) - I have no positions in play with this strategy at this time. 

 

We'll start out with a February position whenever the pullback occurs. Nothing to do right now, we do not want to chase this trend higher.

 

Swing Trades - Markets appear to be moving higher after a corrective pullback. 

Current comments on my candidate strategies:

  • 8/21 ema Crossover - Staying in cash until the next signal.
  • RSI(2) CounterTrend - Awaiting the next RSI(2) signal.
  • Squeeze with 8/21 ema - I have no positions in this strategy and we are awaiting the next squeeze signal.
  • Double 7's Long Strategy - Awaiting the next signal series.

 

I have posted Rules for these strategies in the "Members Only" area of the OptionsLinebacker website.

Reader Questions: none today.


 

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