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1/18/2008 10:24:00 PM

Our services' net portfolio gain for 2007 was 107.8%! For a full break up of this performance, CLICK HERE.

Summary of Position Last Month

We entered a half position in a Jan 1575/1585 Call Option Spread on December 24 and received a premium of $50 per spread. On December 26 we entered a half position in a Jan 1385/1375 Put Option Spread and received a premium of $60 per spread. Then on December 28 we entered the other half position in a Jan 1385/1375 Put Option Spread and received a premium of $90 per spread (after requesting $70). Finally, on January 16 after the market continued to fall, we had to execute defensive action for a cost of $4.50. For our portfolio, this equated to a net loss of $358.63 per $1,000 of margin or 35.86% after commissions for one month (using Interactive Brokers commission rates). Had we not taken this defensive action and "hoped" for a rebound, we would have incurred a net loss of over 90%! Effectively wiping us out given that the CBOE settlement price for the January SPX options was 1333.94. This means that anyone with a Put spread above 1330 would have lost money this month and even if we had been more conservative, we still would have incurred a loss. These sorts of dramatic market movements are not able to be anticipated and are not kind to credit spread players. While it's always tough to take a draw down, we stick with the plan and live another day.

In my experience a loss occurs roughly 1 month out of every 12 months of trades. The degree of that loss cannot be quantified although what we incurred this month is at the higher end of the spectrum and last year it was at the very low end at 1.8%.

Please note, our system is not about avoiding losses, it's about working with probabilities so that the probability of profit is greater than that of loss. It's much like an insurance company that receives a premium for building insurance, the probabilities of damage to a home are very low however every now and then a claim is made and in rare moments a hurricane Katrina will come along and cause a significant set back, it's not probable but it still happens, that's the way life works and there are always some lessons in it for everyone involved.

Current Position:

On January 17th we sold an SPX Feb 1280(SZPNP)/1270(SZPNN) Put Option Spread for a net credit of $1.50.

(i.e. a total premium received of $150 per $1,000 of margin)

Our system moved has moved back into Sell mode, but we will stay put while the market is so oversold.

This current position remains sound and we are approaching a level of significant support in the market that may help us going forward.

SPX Chart - 3 Years

From the bigger picture perspective, with the market decisively moving below the 1400 - 1380 support region, it entered a vacuum that took it to the next level of serious support in the 1300 - 1320 region. This has caused a break in the longer term up trend line at 1350, which indicates we are now in a bear market. This doesn't mean that we won't see some serious upward movements along the way, it simply means that we are entering a period where the market will likely make lower lows and lower highs.

SPX Chart - 6 Months

While we've been calling for a bounce in the market over the last few weeks, the market has been relentless in it's descent, clearly it doesn't matter what we think, the market will do what it wants. Having said that, the markets tendency is to still overshoot the mark and we are getting very close to a point where there is maximum pain for the market participants, i.e. where everyone that wants to sell due to the pain, has sold. This then leaves the buyers ready to begin their bargain hunting which creates a rubber band effect, where the rubber band is stretched too far one way that it springs back. We may still need to go to the 1300 level as a final wash out before the updraft happens so next week may still be weak but a snap back to the 1400 level is also possible.

The quote this week is from me, "entering the financial markets expecting to never have a loss is like entering a relationship and expecting to never have an argument!"

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Have a great long weekend and feel free to email me at angelo@stockbarometer.com if you have any questions or comments.


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