Weekend Market Commentary 2/6/15 – $RUT $SPX $IYR $TLT

Big Picture:

This will be a somewhat abbreviated market commentary because I need to head to work soon.  Links for the first two posts of the “How Should I Invest Series” are below.  The series is intended to be a very basic look at some of the big picture concepts in investing:

How Should I Invest Part 1 – Stay Away From Dirty Clowns

How Should I Invest Part 2 – The Most Powerful Force In Investing

There’s a saying that goes, “This too shall pass.”  That saying sums up the week for my trading.  This week there was a big break break both in Real Estate and Long Bonds, which hurt the ETF Rotation Systems.  The positions that I’ve been holding for a while have a large open profit that got a little bit smaller, but the new positions I took at the end of January are underwater.  Over time I have confidence that the systems will pull through and even though it isn’t fun to lose money, I’m not worried about the systems.

The options trades I have open are doing okayish after the move higher in equities this week.  I also sold a couple of weekly $SPX verticals into the close on Thursday afternoon that look good for now.

SPX Daily Chart Weekly Options

The Weekly Stats:



ETF Rotation System Positions:

All of the ETF Rotation System positions took a hit this week, but the Long Term U.S. Treasury was hit hard ($TLT -5.29%).  Despite the big hits, Real Estate and the Long Bond are still the stop ranked markets for the systems.

Click here to see a copy of the December 2014 Market Momentum Newsletter that covers the systems in more detail.

Options . . .

$RUT Iron Condor:

The RUT Iron Condor is down a small amount of money on the call side, but there isn’t anything to be done about it yet.  The short call delta has decreased from -.10 to -.135 with the move up.  I’m not planning to do anything about the call side until it hits the high teens to 20.  The position has 52 DTE as of today.

RUT Iron Condor

$RUT Butterfly:

The $RUT Butterfly was adjusted this week when $RUT hit the 1200 level.  I adjusted by adding another Butterfly and buying an $IWM call to offset the negative delta.  Even though the position is losing a little bit of money right now, there is very little price risk and the greeks look good.  The position has 40 days to expiration and Theta is going to start kicking in more quickly.

$RUT Put Butterfly

$SPX Weekly Verticals:

On Thursday afternoon I sold a couple of $SPX weekly options verticals during the run up into the close.  I sold one in my IRA and another in my regular account.  Both positions look good after the sell off on Friday afternoon.

$SPX Weekly Options Vertical$SPX Weekly Options Vertical

Trades This Week:

RUT – Bought to open 1130/1180/1230 Put Butterfly for 10.40 (adjustment)

IWM – Bought to open March 2015 117 Call for 4.67 (to hedge delta)

SPX – Sold to open Feb2 2015 2100/2105 call vertical for a .60 credit

SPX – Sold to open Feb2 2015 2105/2110 vertical for a .45 credit

SLV – Sold to close 60 shares at 16.39 (to free up margin)

ETF, Options, & Forex Inventory:

IYR – Long 32 Shares from 76.7699

TLT – Long 18 Shares from 138.50

SCHH – Long 41 Shares from 34.009

SCHH – Long 72 Shares from 38.73

SCHH – Long 4 Shares from 42.28

RWO – Long 92 Shares from 48.49

RWO – Long 5 Shares from 50.92

TLO – Long 63 Shares from 78.94

GLD – Long 18 Shares from 118.99

RUT – 1110/1160/1210 March 2015 Put Butterfly bought for a 9.63 debit

RUT – 1130/1180/1230 March 2015 Put Butterfly bought for a 10.40 debit

IWM – March 2015 120 Call bought for a 1.87 debit (Butterfly Hedge)

IWM – March 2015 117 Call bought for a 4.67 debit (Butterfly Hedge)

RUT – 1030/1040/1290/1300 Mar5 2015 Iron Condor sold for 1.60 credit

SPX – Feb2 2015 2100/2105 call vertical sold for a .60 credit

SPX – Feb2 2015 2105/2110 vertical sold for a .45 credit

Looking ahead:

I’m hoping next week the markets take it a little easier on the ETF Rotation systems.  I’m not sure that I believe the move higher in the S&P 500 this week and that, combined with good location, is why I sold the weekly call spreads.  The market has been flailing about in a relatively tight range for a while now and at some point it’s going to want to move somewhere.  Will that happen this week?  We’ll need to wait and see.

Have a good rest of the weekend and thanks for reading.  Sadly, I’m off to work.

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  • kapil1022

    Hi Dan, It seems that the short RUT condor and long RUT butterfly both do well or poorly under the same scenarios. Are you finding one more desirable than the other?

    • Hi Kapil,

      Thanks for the comment. In some ways you’re correct that they perform similarly, but there are some differences.

      The size of the RUT Butterfly feels much bigger than the IC. Having the long calls cuts down some of that, but it still feels bigger to me. Ideally I’d like to trade the strategy on an index that’s about half as large. I looked at MNX and it doesn’t seem like there’s much open interest in the back months. Trading a 7 point wide Butterfly on SPY would be similar in terms of risk and might be where I head next month.

      One big difference is that the Butterfly does better in a down move than the IC, which I attribute to the option skew steepening. You can read more about that here:


      Historically I’ve preferred (and felt more comfortable) trading butterflies. I think that comes about because the Butterfly has a much better risk/reward to start with and that provides more flexibility for adjustments.

      Do you trade either and/or have a preference?


      • kapil1022

        Hi Dan, It is interesting because you are short theta on the condor and long theta on the butterfly. I tend to use very simple ideas and sell theta in my options trading. For example, I may buy a 1900 spx put 3 weeks out and sell multiple put options between 1700 and 1800. The 1900 option keeps my drawdowns minimal in a correction and sometimes pays off as expiration nears. I avoid strategies that require too many adjustments as I find adjusting quite expensive given bid/ask spreads for many contracts. Others seem to make adjustments successfully but I have struggled with it.

        Have you considered selling a butterfly instead of buying one? This way, when your condor is being threatened, the short butterfly is profiting.

        • Hi Kapil,

          Thanks for the follow up. Both trades are positive theta and short vega (as long as I stay under the expiration break even). It isn’t until RUT gets beyond the butterfly break even point that the greeks begin to change. Note that I bought a Put Butterfly, but I could also have sold an Iron Butterfly.

          The strategy you use that you’re describing above is sort of like a short backratio with multiple strikes. If you were to buy another long option below the shorts you’d essentially have an out of the money broken wing butterfly.

          You’re absolutely correct that the adjustments become expensive. However, my experience has been that the Butterfly is much easier to adjust because you’re starting with a more favorable risk/reward. A couple of months back I was trading Butterflies on IWM while it went racing higher. If I had been trading IC’s it would have been very challenging. It was challenging trading Butterflies, but I think it was still easier to manage.

          I have looked at selling a butterfly a couple of times, but I haven’t explored it extensively. Part of the reason for trading the IC and Fly together is that I wanted to experience the differences in the two strategies simultaneously. Most of the trading I do is trend focused and I’m trying to get a little exposure to something more market neutral.

          Let me know if that raises any new questions. Thanks.