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Market Conditions
(Click on image to enlarge)

Stochastics: 88 (Overbought. Down from 96 last week)
McClellan: +26 (Neutral. Up from +11 last week)
Stocks above their 20 DMA: 67% (Neutral. Down from 75% last week)

No man’s land. 

As expected, some digestion took place this week after the seemingly unstoppable rally witnessed earlier. Pretty much a sideways week, which gives some time for the moving averages to do some catch up.

The S&P is now 2.63% higher than its 50-day average. We’re not at an extreme yet and SPX 2,575 is easily achievable. It’s crazy to think that the 2,500’s have gone so fast and with practically no resistance. Not a time to sell individual Credit Call spreads given the no man’s land condition.

The VIX at 9.61, making us question our life choices. Looking back at VIX’s price history, it looks as if, even in these super calm environments, there is a little VIX spike every 2-3 months. One would have to think if betting on a small increase makes sense given how extremely low these readings are. But timing market falls has been a costly endeavor in the recent past, so we’d have to structure any trade idea with cost efficiency in mind.

Here’s the Russell, also showing some price digestion this week:
(Click on image to enlarge)

Two positions here, both looking good. One of them about to expire.

Current Portfolio

OCT SPX 2250/2260 Credit Put spread
No concerns. Will expire for max this week. A $1,100 gain.

OCT RUT 1270/1280 Credit Put spread
and
IWM 130 Long Puts
Net Credit of $952. The remainder of what used to be an Unbalanced Elephant.
No concerns. Very far out of the money. Will expire for max profit this week.

NOV SPX 2315/2325 Credit Put spread
Net Credit of $1,000. Five weeks to expiration. The remainder of what used to be an Unbalanced Iron Condor. Looking very healthy at the 4-delta mark.
(Click on image to enlarge)

Defense lines: 2,380 (adjust Put side)

NOV SPX 2425/2420 Credit Put spread
Net Credit $250. Five weeks to expiration. Small position of ten 5-point wide spreads.
(Click on image to enlarge)

Because of the small size (only one fourth the typical size), we can afford to delay the adjustment until SPX 2,430. Good odds here too. No concerns for now.

NOV RUT 1380/1390/1580/1590 Unbalanced Iron Condor
Net credit: $1,555. Five weeks to expiration. Some good progress was made this week here: The T+0 line nicely moved up a little and price is still pretty much centered. No concerns for now.
(Click on image to enlarge)

Defense lines: 1,435 to the downside (adjust Put spread) and 1,575 to the upside (adjust Call spread). Both price points are unlikely for the upcoming week.

Action Plan for the Week

– Let both October positions expire for max on Friday morning. It should be a combined $2,052 gain without hassle (*before commissions). 

– Almost no concerns regarding market rallies at this point. Risk to the upside in the Portfolio is very small. If SPX reaches something like 2570 or 2575, I’ll be interested in a potential 2635/2640 Credit Call spread (November options) or 2630/2640. I’d be looking for 0.45 – 0.50 debit on a 5 point spread (10 spreads) or 0.90 – 0.95 credit on a 10-point spread (5 spreads). Combined with the existing Nov 2325/2315 Credit Put spreads we would be in an Unbalanced Iron Condor position again.

– If the market reaches a short-term pessimistic extreme, probably a 3% decline from here, the go-to play is a December SPX Credit Put spread at ten deltas. This condition has only taken place once this year.

– In all other scenarios, the go-to play will be a December SPX Unbalanced Iron Condor late in the week. The potential candidate is now 2350/2360/2640/2650, but as usual, these strike prices may change a bit as the days go by. Once again, I will go with a 4:1 ratio of Puts to Calls.

– An interesting idea is to buy something like January VIX 13 strike Calls (2.45 debit at the moment), betting that at some point in the next 3 months there should be a
little spike. Keeping it as a small bet doesn’t sound like a bad idea.
For someone who doesn’t want to commit 2.45 debit, a 13/18 Debit Call spread is a good alternative: smaller debit to pay. The pure long Call play has potential for a larger gain even with a little VIX spike. I’m not totally sure I will enter this trade now. It is just an idea that sounds interesting and I’m throwing out there.

Economic Calendar

Tuesday: German ZEW Economic Sentiment. Europe’s CPI
Wednesday: US Building Permits and Housing Starts. China’s GDP and Industrial Production.
Thursday: Philly Fed Index
Friday: US Existing Home Sales.

Trade with confidence my friends,
LT

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options for consistent income with solid risk management
, consider acquiring LTOptions, my options trading system to the last detail.

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