Weekend Portfolio Update

Sun, Jun 29, 2008 | superuser


The market has taken a real beating and we’re looking for some short-covering early next week. Government data is light on Monday, and the oft-touted “window dressing” effect might give us a positive move. As we mentioned earlier this week, we aren’t looking at any additional July positions as there are only three weeks (21 days) left until July expiration; given that we typically exit as early as 10 days prior, allowing as few as 11 days isn’t enough to create positive expectancy. We will, however, start looking at August positions soon.

Squishy Weekly Sentiment Index

We’ve developed a proprietary market indicator we’re calling the Squishy Weekly Sentiment Index (SQWI for short). We call it that because a) it’s an index of several individually useful indicators and metrics, b) it primarily gauges sentiment (and some strength levels) in the equities and options markets, c) it is calculated weekly, and d) it shouldn’t be taken too seriously or as a reliable tool – hence “squishy”. It’s just a hobby, really, and certainly a work in progress. It totally failed to predict last week’s selloff, for example. But in any case, we thought you might like to play along, so we’ll start including the SQWI reading each week for your entertainment (and only for your entertainment, this isn’t even educational!).

SQWI for 6/29/08: +7

SQWI ranges from -12 to +12, with 0 predicting a flat or unchanged SPX one week later, and positive (negative) readings predicting the likelihood of bullish (bearish) outcomes. So a reading of +10 would suggest a very high probability that SPX would close higher on the following Friday; it would not give any indication about the expected size of the move, although the most extreme readings should proceed a reversal or selloff/bounce of some significance.

July IWM 65/67/78/80 iron condor

We opened this position on June 10 for an initial credit of $0.52. As of Friday’s close, we could exit this trade for a debit of about $0.42, which represents a paper gain of $0.10, or 6.75% on capital risked. Two points to make here: first, the sustained profitability of this trade in the face of a confirmed bear market is partly due to the continued outperformance of smallcaps on a relative basis. While the Dow has broken its March support levels, the Russell 2k is still in a relatively happy place. Second, this trade is already about halfway through its “life cycle,” which means a fair amount of time value has already decayed. This is a good example of why we always want to open some trades well before the expiration of the prior month.

We will continue to hold this trade, as any positive action in the markets next week should push it further into profitability; if we see a sizable bounce, we may close the trade early to protect profits and reduce our risk.

July DIA 111/113/126/128 iron condor

We opened this position on July 20 for an initial credit of $0.45. As of Friday’s close, we could exit this trade for a debit of about $0.70, which represents a paper loss of $0.25, or -16.12% on capital risked. Obviously, the Dow has been the worst of the worst during the recent selling, but this position still has about a 52% probability of expiring worthless (which we obviously won’t stick around to confirm). A 23.6% retracement (the first Fibonacci level) would put the Dow at 117, but we don’t even need to get that far: if DIA closes next Thursday anywhere above 115.80, this trade will be profitable, and that’s assuming current levels of implied volatility. If we get a bounce with any conviction at all, the IV should come in a bit and help us out as well.

On the downside, there’s no real technical support to speak of in DJIA/DIA, under-the-hood indicators aren’t suggestive of anything like capitulation, and there certainly isn’t reason to expect that good news is on the way, or that good news would be sufficient to turn things around. From a risk management standpoint we don’t want to start letting the negative gamma in this trade get away from us, so we will in all likelihood think about an exit on Thursday.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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