Friday Rally Spoiler; Monthly Service Gains +14% in 49 days vs S&P +4.6%

Dow -0.84%

S&P -0.55%

Nasdaq -0.13%

Russell +1.08%

www.BookingAlpha.com

MARKET UPDATE:

What a hectic "short week" for traders. Markets rallied the 2 day before the 4th of July only to fall sharply the 2 days after. Stocks pulled back strongly on Friday slicing through the 5 Day MA but more importantly, the 100 Day MA.

The jobs report disappointed traders missing expectations of 90k, printing only 80k. The real disappointment was not necessarily the missing of expectations, although it doesn't help, but more importantly, the realization that QE may be not be on the table.

The report indicates the job market is bad but not bad enough to force the Fed for more QE. However, many economists are calling Friday's report possibly the highpoint of of the jobs report for the rest of the summer. That may possibly give the Fed the ammo it needs to launch additional QE to pacify the markets; but this would be down the road. The more likely, and less palatable outcome for traders, is that jobs continue to muddle along like Fridays report; bad, but not bad enough to justify more QE.

Looking to the markets specifically, as mentioned, the S&P sliced through the important 100 Day MA during Friday's pullback. One positive note is the S&P held the 1350-1355 area for Friday's close after trading much of the day below it. The S&P continues in it's trading range from 1280 to 1380-1400. This range should hold until something propels it one way ot the other, like: Earnings, Europe, or the Fed.

Earnings begin this week and stocks may try to take a run at S&P 1380 again on earnings hopes. Earnings pre-announcement warnings are much higher than previous quarters. This does not bode well for stocks overall.

It is also worth noting that volatility has contracted marked recently. The volatility skew for the next few months has also come down indicating traders don't expect major market gyrations in the next 6-12 weeks. Our analysis indicates this is the time to buy volatility as with Europe far from fixed, the upcoming US Presidential elections, earnings, etc. we anticipate volatility to increase. Typically, buying volatility (VIX) between 15-18 is a profitable endeavour.

Navigate wisely and stay profitable, my friends. Happy trading!

BOOKINGALPHA UPDATE:

Monthly Trading Service Commentary:

The performance for the entire Monthly Trading Service portfolio has been +14.14% since May OpEx. That is +14.14% in 49 trading days! The S&P's gain for that same time period has been +4.6%.

This week's volatility provided us an opportunity to close a trade on Friday that was opened 24 hours before:

RUT 850/855 Bear Call Credit Spread yielding +6.67% in 1 day

The Monthly Service portfolio closed a great June posting closed positions yielding a +10.53% gain for the month. July is already off to a great start already posting a +3.43% gain. This goes a long way to rebuilding after a tough start to the year. We have made some minor adjustments to our strategy which are paying off handsomely. We are very excited about the balance of the year.

After a rough start to the year, the Monthly Trading Service is performing well as a result of the strategy tweaks we implemented in response to the trading action. The Service currently has only 1 July IWM Bear Call Spread open with more positions slated for the upcoming trading week.

We are already looking at opening August positions as with only 2 weeks left in the July cycle and volatility premiums so low, August is starting to provide some nice setups for entry now with a plan to exit well before August expiration.

While losses are unfortunate, they are a part of trading. Looking at past trading years you will see drawdowns like this do occur and ultimately, how we prevailed. This is not a justification, merely a reminder that this situation is still within the realm of normal portfolio gyration. While it may be uncomfortable and is surely no fun, my position sizing allows for these drawdowns providing enough capital to recover. See past year's results and let them speak for themselves. For more information please read: Generating Alpha Comes With Volatility

Monthly Trading Service YTD vs S&P 500:

-5.53% YTD BookingAlpha Monthly Advisory

vs.

+8.21% YTD S&P 500

See Trading Record

Weekly Trading Service Commentary:

This week we closed the SPY Iron Butterfly for a manageable loss. This was like getting a gift (weird to say about a loss, I know) because Thursday this trade was facing a potentially huge loss and would have required a roll which would have not necessarily mitigated risk, but only bought time.

The Iron Butterfly was created by selling a SPY Put Credit Spread to bring in some income by using the existing Call Credit Spread margin requirement. It looked like we were going to be in the Call Credit Spreads for awhile, via future anticipated roll adjustments considering the rally that was occurring, and the plan in that circumstance is to sell puts to generate income while the calls are rolled out.

We definitely did not want to roll out the exposure of the call position considering its proximity to the market. Fortunately, our analysis of the stretched market rally and Jobs Report expectations was spot on and allowed us to get out of the trade with our hides. Although the trade was a loss, it was much smaller than it looked like it could be just 24 hours earlier. We timed the closing pretty well getting out near the lowest exit price, ie: smallest loss, of the day. More importantly, we eliminated future exposure to potentially larger losses by closing the spread.

As mentioned in Friday's blog update, we are going to pull way back on selling as many credit spread scalps as the market has changed. For years we have been able to generate consistent scalp returns on a weekly basis. However, volatility is low (from an option premium perspective) and headline risk and the resulting market volatility, has been eating our lunch on the scalp trades lately. Weekly spreads are very Gamma sensitive and credit scalping is not working in this environment like it has for years. in addition to not working, the risk reward for these ultra short term trades is not favorable enough as one loss wipes out weeks/months of gains and roll adjustments are not able to generate enough safety to readjust risk.

Instead, we will be moving into more debit spreads and long calls/puts than credits going forward. Both Debit Spreads and long calls/puts allow us more flexibility in both trade repair and risk mitigation if we are wrong. Additionally, these strategies allow for much more favorable roll adjustments if we require more time for the trade to work into its profit zone. Furthermore, the risk/reward is more favorable with these trades providing either early exit opportunities to lock in profits and/or larger profits per trade.

This doesn't mean we will eliminate credit spread selling completely. What it does mean is that we will utilize more diverse strategies to stabilize the portfolio fluctuations of the Weekly Service and provide enhanced risk mitigation when things go against us.

We plan to open our first trade with the new strategy this week using the VIX to get long volatility. Stay tuned!

While losses are unfortunate, they are a part of trading. Looking at past trading years you will see drawdowns like this do occur and ultimately, how we prevailed. This is not a justification, merely a reminder that this situation is still within the realm of normal portfolio gyration. While it may be uncomfortable and is surely no fun, my position sizing allows for these drawdowns providing enough capital to recover. See past year's results and let them speak for themselves. For more information please read: Generating Alpha Comes With Volatility