HUH's crash and burn trading thread

Typically the summer months tend to be quite slow and boring. However, this time around we have the potential for some pretty interesting times for us stock market junkies. I'm of course looking at the good old Naz. Another significant event is about to occur, specifically the golden cross on the EMA's is looking like its going to occur in the next couple of days. For those who don't know, the death cross is when the 50 day and 200 day cross to the downside and is very often followed by a bear market. But the opposite golden cross where the 50 day and 200 day cross to the upside very often is followed by a solid bull market. Currently the nasdaq has the following:

50day EMA: 1745.30
200day EMA: 1752.22

So this cross will occur either tomorrow or monday if the bears can't get a handle on this market. If the cross is allowed to occur then the Nasdaq will have entered a bull market and we'll probably see more buyers rush in causing even more buying pressure. The importance of this is that if the Naz is in a bull market then we're going to not only get a pop higher, but every attempt to sell this market off will be met with more dip buying and short squeezing. This means that the Naz is going to crank higher and it will take a lot to knock this thing down to a meaningful level. Its not going to be easy to break the golden cross, obviously it could happen but historically its a rare occurence to see the cross break in less than a 3 month period and even when it is the downside move tends to not be very deep. Why is this important? Again, the SPX, RUT, and NAZ all tend to move in the same direction (the % move differs but up or down is the same). So if the Naz is cranking higher then that means the RUT and SPX will also be going higher.
To truly celebrate the golden cross you need the wood, the fire, and the food for the party....

The Naz is bringing the wood,

Looking at the RUT
50day EMA: 493.76
200day EMA: 511.67

At this rate, the RUT will bring the fire in I'd say roughly 10 - 15 trading days and the SPX is going to deliver the bear meat in 4-5 weeks. Obviously I'm joking a bit but one thing that is not a joke is the effectiveness of the death crosses and golden crosses as indicators of bear market beginnings and bull market beginnings. I know it is hard to believe that we could be at the cusp of seeing this bear market end based on the economic environment but I have to remind myself to separate the stock market from the economy. The "bear market" ends when the stock market decides it ends regardless of the situation on main street. I have to be honest when I say that I will miss this bear market as its been lucrative but I"m ready to move on as the pointless doom and gloom is getting old and I'm ready for some pointless exuberance for awhile. The bread and butter for my options trading for the past couple years has been volatility and to see the volatility shrink as it does in bull markets is truly sad :) I am going to have to refocus and go back to my lower volatility trading days which will probably take me sometime to adjust to.

As for the portfolio, I am sitting and waiting to see what happens. If we can get the RUT to rally back to the 540 area then I am looking to start building some put positions in the 570-580 area while doing some adjusting on the call side. If the market sells off then we'll do some work to try and take advantage of the down move.

All is not lost for the bears as there does seem to be a head and shoulders forming on the S&P with the right shoulder around the 930 level. So if the bears can keep the market from breaking this area then we have a good chance of correcting once again and buy the bears some more time in the bear market....but the clock is ticking.......
 
So far we did get a selloff to retest the 50 day EMA's and all 3 indexes held and rallied off the retests. So now we have scenario #2 playing out where we got a week of consolidation. The market is in a mixed read so far. I was wrong about the golden cross on the Naz occuring today, if you look the 50 and 200 golden cross is only about 1 pt away! So looks like the Naz is getting the GC tomorrow unless we get a 5% drop in the market tomorrow. The cross is going to occur around the 1755 area and the Naz is at 1844.

So the market seems mixed due to the following:
Bearish -- The market is pretty overbought on the short term and we should get a pullback. The light volume this week and some profit taking before the jobs report thursday might be the catalyst to take a little profit off the table. The S&P is testing that 930 area where the right shoulder is sitting on the charts and today we came pretty close to the 930 level and it held. So this might act as a decent resistance level to cause another small pullback. The RUT is underperforming and has not been able to close above the 200 day EMA again.

Bullish -- 50 day is holding strong. The golden cross on the Naz should put in a temporary intermediate floor in the market. The reason for the temporary floor is that it appears that expectations are pretty low once again for earnings and people seem to be pricing in either a flat or slightly positive 3rd quarter GDP. My view is that in order to break the golden crosses we would need to start getting indications that the 3rd quarter GDP is going to be negative afterall if the economy is not ready to recover yet. But we won't start to get the Q3 data till later which is why I believe we'll probably hold the cross levels in the intermediate term. If we get pullbacks then I don't expect that we will get a close below the 488 level on the RUT but you never know.

Since the market is mixed right now I decided to start paring back on some of my 480/490 calls.

For the position
bot july 480/490 call/short junQ 39 iwm call @ credit of $100.54
I sold the 480/490 call spread for $798 and am left with the following:
short junQ 39 iwm call @ credit of $898.54
I may go ahead and sell a couple more of these if the market keeps heading higher. If we get a pullback (we're pretty overbought) then I'll go ahead and re-establish the positions at a lower price than what I sold them for.

So its just a waiting game in consolidation periods.
 
All 7 of my junQ iwm calls were assigned to me before the open today. So right now I'm short 700 shares of iwm instead of being short 7 calls which is essentially the samething since they were so in the money. I'll probably have to pay out for a small dividend on the shares but not a big deal.

So far the Naz is going along and has gotten the golden cross which is bullish. The S&P is hitting resistance at the 930 level and finding support at the 20 day EMA (917). I'm waiting to see which breaks, hopefully the jobs report will facilitate one of these levels breaking. If 930 breaks then S&P will head to the 950-960 level which should take RUT into the 530-540 area where its more reasonable to start putting on some put spreads. If 917 breaks then its a matter of watching and seeing if the 50 day avgs are still holding.
 
The RUT is still dinking around the 485-495 area. The 50 day avg is sitting around 496 so we're essentially hovering around it. The bears can't seem to crack that 487-490 area because everytime dip buyers move in. If we do break this 490 area on a closing basis then I am expecting a considerable drop (5-8%). The earnings expectations once again are so low that it would be truly pathetic if the S&P did not at least come in line with expectations. As such right now I am still bullish at this point (but I reserve the right to change my mind at anytime :p )

An update on the portfolio....I was assigned on all 7 of my in the money junQ calls so I am short 700 shares of IWM. Also I had to pay a dividend of $18.10 per 100 shares. So here is an explanation of my positions:

Originally I had the following position:
bot july 480/490 call/short junQ 33 iwm call @ credit of $515.73
Once I was assigned on the 33 iwm call, I received $3300 and paid $18.10 "in lieu of dividend" or WTFever. So I basically have the following now:
bot july 480/490 call/short 100 shares iwm @ credit of (515.73+3300-18.10) = $3797.63
So I've done this calculation with all seven of my open positions and I have the following open:

bot july 480/490 call/short 100 shares iwm @ credit of $3855.85
bot july 480/490 call/short 100 shares iwm @ credit of $3785.16
bot july 480/490 call/short 100 shares iwm @ credit of $3921.08
bot july 480/490 call/short 100 shares iwm @ credit of $3797.63
bot july 480/490 call/short 100 shares iwm @ credit of $3723.44
bot july 480/490 call/short 100 shares iwm @ credit of $3766.99
short 100 shares iwm @ credit of $4780.44

Gameplan:
1) If support breaks at 490 then I will look to sell the 480/490 call spreads for a loss and depending on how far the drop is I'll re-open additional call spreads at lower strikes (440/450). Again the short iwm shares will gain value dollar for dollar with the drop but the call spreads should not lose as much.

2) If we bounce off support and can reclaim the 510 level on the RUT then I'm going to go ahead and open 7 matching puts around the 53 or 54 iwm strike essentially putting on a choker on the market because the loss from the IWM short shares will be offset by a gain dollar for dollar by the short IWM puts at the 53/54 strike......while my 480/490 call spreads should go fully in the money giving me additional gains.

Right now just waiting......
 
Just a frustrating week! We finally got the break of the 490 level which is good BUT my trade was setup for a significant drop below to the 460 level with a quick move. If that had occurred then it would have been a no-brainer for me to go ahead and dump my 480/490 calls and look to open new call spreads in much lower strikes while taking advantage of the gains in the short iwm stock. Instead we got freaking consolidation all week. I should have suspected consolidation based on how the important earnings are next week but I didn't. Instead I've been watching the premium on my 480/490 spreads decay. The market is sitting in the middle of the seesaw especially the S&P around the 880 level. So its difficult to just go ahead and sell off my 480/490 calls and take a loss because the market just needs to move up 10 pts so suffice it to say its been a frustrating week to watch the markets.

Its pretty clear that next tuesday when goldman reports at the open and then intel comes in should get the market finally moving up or down by a significant amount.

I made a change to the following position today:
bot july 480/490 call/short 100 shares iwm @ credit of $3921.08

I sold the 480/490 call for $428 and to get some additional downside protection I added 4 july 460/450/440 put flies for a $241.20
So this position becomes
bot 4 july 460/450/440 butterflies/short 100 shares iwm @ credit of $4107.88

I still expect us to bounce higher from this level next week but then it would be stupid for me to not do something in case I am wrong. My expectation here is that if we get good earnings and bounce we should get a nice bounce over 490 so my remaining 5 480/490 call spreads will go fully in the money. If I am wrong and the market drops then I think it is a reasonable assumption that the Head and Shoulder is going to play out on the S&P and we should get a breakdown to the 850 and eventually 825 level. This should get the RUT moving down as well which should get the butterflies premium up. Obviously I'm not expecting that the market is gonna hit 450 on the nose and I'll have a jackpot. Instead, unlike this week, the market should move up or down more significantly and frankly I'd be happy with RUT being above 490 or below 470 next Tuesday.

Anyway here are the current open positions going into next week:
bot july 480/490 call/short 100 shares iwm @ credit of $3855.85
bot july 480/490 call/short 100 shares iwm @ credit of $3785.16
bot 4 july 460/450/440 butterflies/short 100 shares iwm @ credit of $4107.88
bot july 480/490 call/short 100 shares iwm @ credit of $3797.63
bot july 480/490 call/short 100 shares iwm @ credit of $3723.44
bot july 480/490 call/short 100 shares iwm @ credit of $3766.99
short 100 shares iwm @ credit of $4780.44
 
Finally got some movement in the market. Still a bit uneasy going into the rash of earnings starting tomorrow morning. We rallied right up into resistance and theres really no clues as to whether we've priced in financials earnings today in which case a sell the news scenario could play out starting tomorrow. So I'm still a little bit aggressively watching my 480/490 calls.

I made the following changes today:

I closed the following position:
short 100 shares iwm @ credit of $4780.44
I bought back the 100 shares for $4752 which results in a profit of $28.44. Not much but more importantly, it unwinds one of my broken positions...just 6 more to go :)

Like I said there's not enough evidence to support this move up yet so I did another adjustment on one of the remaining positions:

bot july 480/490 call/short 100 shares iwm @ credit of $3855.85
I sold the 480/490 call for $658 and bought 3 480/470/460 july put flies for $350.20 which results in the following:
bot 3 july 480/470/460 butterflies/short 100 shares iwm @ credit of $4163.65

I currently have the following:

CLOSED POSITIONS
short 100 shares iwm @ profit of $28.44

OPEN POSITIONS
bot 3 july 480/470/460 butterflies/short 100 shares iwm @ credit of $4163.65
bot july 480/490 call/short 100 shares iwm @ credit of $3785.16
bot 4 july 460/450/440 butterflies/short 100 shares iwm @ credit of $4107.88
bot july 480/490 call/short 100 shares iwm @ credit of $3797.63
bot july 480/490 call/short 100 shares iwm @ credit of $3723.44
bot july 480/490 call/short 100 shares iwm @ credit of $3766.99

At this point I feel pretty comfortable going into this weeks earnings and option expiration. Lets see how it plays out and I can adjust further if necessary.
 
I don't understand the logic behind butterfly. If you expect stock to move to that level, you can buy back IWM for cheap anyway than why bother buying butterflies.
 
Quote from valpak:

I don't understand the logic behind butterfly. If you expect stock to move to that level, you can buy back IWM for cheap anyway than why bother buying butterflies.
More...

The butterfly positions were a cheap hedge in case the market started to breakdown. The problem is that when RUT was at 480 and the market falls to 460 then I would make $200 from the IWM short shares but would lose all the money $400+ on my 480/490 calls. Since there is very little time left, the butterfly should benefit from a pullback. So if the market had fallen to 450 for instance, then I would make $4000 because I am long 4 of the 460/450/440 butterflies. This would make up for all losses on the remaining 480/490 call spreads.

Based on the intel news it looks like I didn't need to do the hedging as it appears that the market is going to bounce higher. So I basically sacrificed 2 480/490 call spreads to try and hedge against a loss on the remaining 4 480/490 calls. Also I chose to do a butterfly rather than just buying a straight put spread because I was still expecting a bounce higher and if a breakdown occurred then I didn't expect it to go below that 450 level, so the butterfly is a bit cheaper. Hopefully this provides a little bit of clarity, if not let me know!
 
Thanks for the detailed explanation!

I understand the first time you bought butterflies but somehow I still don't understand the second adjustment. All I can infer that you were being too cautious and I guess I can't blame you with VIX so high (uncertainty)
 
Quote from valpak:

Thanks for the detailed explanation!

I understand the first time you bought butterflies but somehow I still don't understand the second adjustment. All I can infer that you were being too cautious and I guess I can't blame you with VIX so high (uncertainty)
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Yes thats correct, the second set of flies was just added caution since a break of that 480 level would have sent the market waaay down. Its a shame I had to sacrifice two call spreads but oh well better safe than sorry.

I went ahead and made the following adjustment:
bot july 480/490 call/short 100 shares iwm @ credit of $3723.44
I sold the 480/490 call spread for $978 so now I just have the following:
short 100 shares iwm @ credit of $4701.44

I also added the following positions:
bot aug 480/490 RUT call @ cost of $752
bot aug 560/550 put/short aug 55 iwm put @ cost of $396.75
 
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