Weekend Portfolio Analysis (January 24, 2015)

As this is the first weekend portfolio review of this blog, it will be a bit lengthy as I review all the positions that have been placed in my account since the beginning of the year.

Market Conditions
It was a strong week for all of the major indices despite the selloff on Friday with lots of two-sided action almost every day. In the end the SPX index opened Tuesday at 2020.76 and closed the abbreviated trading week at 2051.82 for a 1.53% gain. The VIX started the week at 20.07 but continued to revert to the mean through the week ending at 16.66.


March Positions
The RUT and SPX credit spreads below make up the core of my portfolio. These are all extremely high probability, defined-risk trades and should conservatively generate a 2-3% return on capital per month.

RUT Mar 15 1000/990 Bull Put Spread
$80 Credit. 54 days to expiration and 90% probability of success. This trade was placed last week on January 14th when the RUT was down over 4% from its short term high of 1221.44 on December 31, 2014. This is a high probability trade and is in good shape.

RUT Mar5 15 1000/990 Bull Put Spread
$100 Credit. 66 days to expiration and 90% probability of success. Similar to the trade above, but using the quarterly (Mar 30th) expiration. This trade was placed the day after the trade above on January 15th when the RUT declined again offering another opportunity to collect some good premium for these options. Again, this is a high probability trade and both of the RUT trades are currently showing a good profit.

SPX Mar 15 1750/1745 Bull Put Spread
$140 Credit. 54 days to expiration and 90% probability of success. Two contracts were sold on January 12th for a total of $60 when the SPX was down over 3% from its short-term high of 2093 on December 29, 2014. Two days later with the VIX above 21 and the SPX down nearly another 40 points, I sold two more contracts for a total of $80. Both of these positions are almost full winners at this point. Friday I placed GTC orders to close each contract for $0.05, but was not filled.

SPX Mar 15 1720/1710 Bull Put Spread
$65 Credit. 54 days to expiration and 95% probability of success. As the market continued to slide on January 14th, I sold one contract of this 10-point wide. With the expanded volatility from the downward movement of the SPX, I was able to sell this contract way out of the money and still take in a reasonable credit. Friday I placed a GTC order to close this at $0.10. It traded at that level all day, but I was never filled.

In addition to the core positions above, I also have some higher risk positions listed below. These positions still offer protection in the event of a one standard deviation move of the underlying, but they do not offer the advantage of diversification as in the indices above.

SPY Feb 15 208/209 Bear Call Spread
$54 Credit. 27 days to expiration and 73% probability of success. This position is just a small hedge against the core positions above. If the market continues it choppy movements, I should be able to close the trade profitably before expiration.

EBAY Mar 15 60/62.5/50/47.5 Iron Condor
$44 Credit. 54 days to expiration and 68% probability of success. After earnings were released on January 21, the implied volatility continued to remain high in these options. Thursday I sold a this iron condor with each of the short strikes at an 84% (one standard deviation) probability out of the money (OTM). This is a higher risk trade although it does not put much capital at risk. I am comfortable with this trade particularly since it helps offset my long delta portfolio a bit.

USO Mar 15 20/22/14/12 Iron Condor
$50 Credit. 54 days to expiration and 68% probability of success. Crude oil declined again Friday after Thursday’s negative excess inventory report. Although I think that oil still has downside risk, I believe that most of the bad news is already reflected in the current oil prices and as inventories continue to rise, the price is likely to decline slowly. At these levels, I do not think that another quick and large decline is imminent. With the implied volatility at nearly 100%, I sold this iron condor today. This dovetails with the next trade.

/CL Apr 15 28 Put
$120 Credit. 52 days until expiration and 97% probability of success. Futures options offer much greater leverage than standard equity options. However, with that leverage comes significant risk. This is a naked option which means that the risk is infinite. Last year I traded a lot of crude oil futures options and had a great deal of success until I got greedy. When making undefined risk trades, it is crucial that you keep your trade size extremely small and manageable. It is possible to consistently make fantastic returns trading these options. But after some success, the temptation to trade more and more contracts at one time becomes irresistible. Once you start trading larger than you really can afford, disaster is just around the corner. I learned the hard way. That being said, I feel completely comfortable this kind of trade as long as it is a single contract, and is managed carefully. I will not hold this until expiration. In fact, I hope to close it by the end of next week.

Closed Positions

GS Jan 15 185/190/175/170 Iron Condor
$36 Profit after commission. This was an earnings play. Occasionally I will do earnings trades which take advantage of the volatility crush after earnings are announced. These one-day trades are structured so that as long as the stock stays within the expected move, it will be profitable. Although statistically speaking, stocks typically move less than the expected move after earnings, it really is a bit of a crap shoot. I don’t do a lot of these trades, but they help keep me engaged. Again, the key with these higher risk trades is to limit your exposure.

Action plan for the week

If the market trades up next week, I will be looking to close out some of the SPX credit put spreads. If the SPX moves up another 40 points this week, I will be looking at selling a call credit spread with a 90% probability of expiring out of the money. On the other hand, if the SPX trades down around the 2000 level, I will look to sell another put spread.

I will also be closely watching crude oil prices this week. I will be closing my position if either a) I reach 50% of maximum potential profit or b) my loss equals two times the credit received.

Thanks for visiting this blog. Feel free to leave comments below.

  • disqus_YXfNOvlbpA

    Nice post. I like the format and style of your blog. You should have a page to show your open and closed trades in a spreadsheet like format. Also, is there a way for others to follow this blog via RSS feed.

    • Aram Basmadjian

      Thank you for your suggestions. I will be adding an RSS button and the Positions page this weekend. Currently you can receive the blog posts via email by signing up for the email list.

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  • Steve W

    Hi, Aram. What is the indicator you use in your TOS charts labeled “Rank Levels?” I can’t find that under studies in my TOS platform.


    • Aram Basmadjian

      Hi Steve! It is a study not included with the default TOS installation. I have emailed you the thinkscript for this TOS study.