SPX Credit Call Spread - 3/14/16

On 2/28/16 I published the following update about the Credit Call Spread -- "On 2/22, the SPX (S&P 500 index) was up against resistance around 1940 and I filled a 1990/1995 Credit Call Spread for a credit of 1.25 expiring March 11th or 18 days til expiration.

In terms of defense, I will close the spread for a loss if either 1) the SPX crosses 1970 or 2) the spread gets to about 2.10-2.25. If the SPX drops, and the spread gets to about 20-30c anytime this week, I will also close out the spread early for a "win"."

Update: On 3/2/16 the SPX crossed 1970, and I closed out my spread at 1.95 for a 70c loss. Today, 3/14/16, the SPX closed at 2020, that means with about 4 days to expiry if I held the spread I would be close to taking a full loss. 
Lesson -- the days to expiration was only 25 days. Safer spreads are typically found between 40-60 days.  

It's important to realize as a trader, CAPITAL IS YOUR INVENTORY. SMALL LOSSES need to be taken in order to ensure that you can make the next trade.

Therefore, on March 7th, I re-entered a 2080/2090 credit call spread when the SPX was ~2000 for a 2.10 credit this time with about 46 days to expiration. 


On March 10th, the SPX dropped intraday to 1970 and the spread went to 1.30, I didn't close it expecting theta to continue to eat into the spread. However, on Friday, 3/11, the SPX ripped 32 points to close at 2022. My spread went from 1.30-->2.90 in one day. My emotions changed quickly, and I considered closing the position but because of resistance at the 200DMA, I decided to hold on.

As of the close on March 14th, my spread closed at 2.55 and the SPX closed at 2020. As every day passes, theta will eat into my credit call spread (a good thing- position is theta positive). My current break-even for tomorrow (3/15) is if the SPX gets to 2010, then my spread will get back to ~2.10. 

In terms of defense, I will close the spread for a loss if either 1) the SPX crosses 2045 or 2) the spread gets to about 3.40-3.60. If the SPX drops, and the spread gets to about 20-30c anytime, I will also close out the spread early for a "win".

Again, play defense and set stop limits!!

Is the SP 500 Overvalued? Part II

As a continuation from the previous post, I will now share the SP 500 juxtasposed with GAAP Reported Earnings by Quarter (not by Trailing Twelve Months). All of this data can be found here http://us.spindices.com/indices/equity/sp-500

The SP 500 was loosely tracking GAAP EPS each quarter and then in late 2014 a large divergence developed between the SP 500 index and the Quarterly GAAP EPS. As a side note, **Reported earnings = Income from continuing operations GAAP (Generally Accepted Accounting Principles) and includes corporate (M&A, financing, layoffs), and unusual items. At the quarter close of 9/30/2010 the SP 500 was around 1140 and the GAAP EPS # was similar to today's GAAP EPS #. 





Is QE and ZIRP to blame for the divergence? Was this EPS drop a one quarter anomaly? One thing is for certain, central banks have caused MASSIVE DISTORTION in Markets. If the SP 500 index actually traded based on fundamentals and earnings power, the index *should* be much lower than where we are today.

Lastly, I found a graphic from the St. Louis Federal Reserve which depicts merchant wholesales inventories-to-sales ratio. When inventories rise and/or sales decline, this ratio rises. This ratio has not been this high since the 2009 financial crisis! Will central banks ever allow markets to focus on price discovery or will they forever coordinate a stimulative illusion? Central Banks around the world seem to be delaying the inevitable day of reckoning, because today the distortions don't support reality.

Semper inops quicumque cupit - Whoever desires is always poor.