Using Option Credit Spreads To Build Wealth: Update May11-15, Trades May 18-22
Seeking Alpha Analyst Since 2012
I trade options as a replacement to owning stock to earn income. I primarily trade iron condors and calendars using index and futures options. i focus on strategies to preserve capital over the long - term
The markets this week did not experience the same level of volatility as has been evident for the past few months. It took a few days, but eventually the S&P500 moved up, setting a new all time high at the close on Friday, and breaking out above channel resistance. Momentum is positive and SPX has not yet reached oversold. The number of new highs - new lows spiked up nicely, and market breadth also improved, more less in tandem with price. However, the volume accompanying the move up was anemic, as was advance - decline volume. While an upside move might be expected as a completion of the upward triangle formation SPX has been in the past couple of months, we need to see if this break will be confirmed in the upcoming week. Otherwise a trip down to resistance at 2080 is on the cards. RUT also moved up at the end of the week, coming to rest at the 50MA. Momentum is also positive, but it will probably take a broader market move to make a new high.
The US economy appears to be ticking along - the Empire State Manufacturing Survey ticked back up this month indicating a steadying of activity. Initial unemployment claims came in below expectations once again. Headline retail sales came quite a bit below expectations, but removing the impact of decreasing energy prices, sales continue to show YoY growth. Core producer prices, while more volatile than consumer prices, show no evidence of a deflationary trend. The upshot is that a recession is a remote possibility over the near term. Potential dangers to the markets appear to lie in exogenous events, of which the most obvious are the on-going Greek tragedy, a continuing blow up of global bond markets, and the possibility that the Fed. will raise interest rates sooner (June) rather than later (Sept. - Dec.) There are lots of opinions out there concerning these issues, but since I don't own a functioning crystal ball, it is best to continue with a conservative stance w.r.t. choice of short strikes.
The S&P500 June Future (ESM15) showed a little larger moves at the end of the week than SPX, clearing the all time high with just a tad more room. As we can see, momentum is pointing up, while RSI is well below overbought. Further positive signals regarding the strength of the economy in next week's slew of reports may the catalyst to push prices higher.
RUT is at 1243, needing another 30 points to get to the all time high. Barring strong market moves next week, it may take another week or more before it gets there.
AAPL did not follow the market to a new high, instead moving up off the 50 MA to the center of its channel. No clear signals from the price action as to where it will go from here, so I'm being careful with strike choices once again.
Finally, GILD blew past resistance at 105 this week! No obvious business catalyst, but management did announce a date for the first dividend payment, and the market seemed to respond very positively. It finished the week at 109.3, with momentum staying positive. It can move higher without hitting oversold, hopefully getting past 110 this week and closing on the all time high of 115.
SWKS made it past 97.5 on Thursday, but was unable to maintain an upward tilt for the joust this week, and it fell back to the resistance line on Friday. I'm still expecting good things, and I think SWKS will respond positively if the market continues higher. Otherwise it will continue to trade between 95 and 98.
I changed the CELG chart this week to reflect a downward channel in the most recent price trend. However, support appears to be at 108 (200MA) rather than the lower channel limit of 104. An up trend has been in place over the past 2 weeks, and on Friday CELG broke through resistance and stopped at the 50MA at 116. Momentum is trending up nicely, suggesting further upside potential. Before I open another put spread, I would like to see it get past 116, and preferably 119, to confirm that the down trend is over.
This week all the open spreads (AAPL, GILD, SWKS, ES) expired OTM. I opened new spreads for AAPL, SWKS and EW4 for the 5/22 expiration. No matter how I tried I could not get the premium I wanted with GILD at strikes of 100 or below. I will have to wait for the 5/29 expiration and push the strike up to the 200MA at 102. If CELG continues to look promising I'll shoot for a spread at 108. Profitability is still looking good for this month, with the potential for the 5/29 expiration to give a further boost.
Reading List
- Cam Hui looks at employment numbers and shows that employment rates are now the highest percentage of the civilian workforce ever! Perhaps this is influenced by workforce participation rate decreasing recently. However, he suggests these numbers indicate there is not much slack in the labor force, and the Fed may well act sooner than anticipated to limit inflation as wages start to increase. http://humblestudentofthemarkets.blogspot.tw/2015/05/a-scary-thought-about-us-employment.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+blogspot/SeoDJ+(Humble+Student+of+the+Markets)
- This recovery just don't get no respect. http://www.investing.com/analysis/the-economic-recovery-that-can't-get-any-respect-251132
- Global growth is slowing? Mainly due to a slowing of US imports. https://seekingalpha.com/insight/alternative-investing/article/3164246-is-a-global-economic-recession-coming
- Cam Hui and Bundegeddon. Technical indicators are pointing to downside for stocks. Investor sentiment is neutral; the market appears to have lost momentum. So, all that is necessary now is a catalyst - who'd have thunk the bund market would have been the catalyst last week? www.investing.com/analysis/what-i-learne...
- Harry Dent recommends that we get out of the market now. We are at a point where the time between tops for 2000 and 2007 is the same as from the 2007 top to now. (Unclear why he thinks this is so significant). He predicts we are now at a market top, on the way down to -70% by early 2017, and -80% by 2020. https://seekingalpha.com/article/3177276-the-impending-collapse-most-economists-miss-this
- Cam Hui suggests the Fed will not help the markets from here on out. Interest rates will rise this year. Better for the markets to have their reaction now and build the increase into future expectations. https://seekingalpha.com/article/3177406-bulls-shouldnt-expect-help-from-the-fed
- A couple of good examples of why it is important to look into the details of headline economic indicators. In these examples recent energy price trends are both responsible for apparent strength or weakness in the data. http://www.investing.com/analysis/retail-sales:-the-misleading-read-251679
- Bond market volatility hints at a lack of liquidity e.g. banks have cut back their bond holdings because of Dodd-Frank. It is important that bond markets have a smooth transition as the Fed increases rates, otherwise bond market volatility will spill over into equities. We have been seeing this lately. https://seekingalpha.com/article/3181596-interest-rates-and-the-bond-market-why-you-should-care
- Brian Gilmartin is looking at the SPX in terms of earnings yield, and finds that compared to current investment grade bond yields, the SPX is undervalued. Similar to recent arguments put forward by Scott Grannis and Joe Fieder https://seekingalpha.com/article/3181656-looking-at-the-s-and-p-500s-valuation
- Another article assessing the state of the bond market. The thrust of the article is that the US has seen previous extended periods of low interest rates. Given the current economic conditions, it is likely that low interest rates are going to be here for some time. The US, along with much of the developed world, appears to be caught in a liquidity trap. https://seekingalpha.com/article/3179886-omg-putting-jump-in-interest-rates-into-perspective
- Core PPI is stable despite the recent volatility introduced by energy price fluctuations - this affects only the headline PPI. Subtracting the core PPI from 10 year yields shows that real yields are now ~0 - back to the situation of the late 1970s. As a result, bank credit is increasing. This will push the Fed to consider raising interest rates sooner rather than later to avoid a pick up in the PPI. https://seekingalpha.com/article/3185706-no-deflation-in-the-ppi
If have open put credit spreads as listed in this article, and I will definitely be opening more in the next 72 hours
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