When does diversification become a bad thing? $SPY $QQQ $IWM

The Animal Spirits podcast is fast becoming one of my favorites for keeping up to date on what’s happening in the financial world. I don’t think I am alone in this. I still watch CNBC mostly to catch Fast Money Halftime but even then, I mostly watch that show to see what Josh Brown’s take on the markets is.  

The common thread between these two sources is that Josh Brown, Ben Carlson and Michael Batnick are all relatively young guys and all three are associated with Ritholz Wealth Management.  

On the most recent podcast of April 11, Episode 24 they reference a quote from Lazlo Birinyi in the New York Times from October 24, 2009. “My issue with diversification beyond that (stocks and bonds) is that an incremental or arithmetic increase in the number of decisions you make leads to a geometric increase in the degree of difficulty (to outperform)”. 

This arose from a discussion on the story that Drew Brees lost several million dollars investing in diamonds thinking, or being advised, that diamonds would outperform stocks and bonds. 

How does this relate to us? Maybe if you are going to speculate on something outside of the traditional market such as art, or Bitcoin, or watches or diamonds, you should only invest what you are prepared to lose. Just assume the value is going to zero. I would only increase the size of my position if I was felt strongly that I knew the market in that asset.  

It’s not only about making money, it’s also about getting a good night’s sleep! 

The Middle Path $SPY $QQQ $IWM $DIA

It’s getting close to about six weeks since the start of the correction. SPY went from about 285 in the final days of January 2018 to a low of about 256 on February 9 or 10. 

There was a rebound to about 275 around February 25 or so and then another pull back to 265 around the first of March. 

Another rally to 277 and now we sit about 275. Let’s take a look. 

Here’s what I see, this looks like a couple of higher highs, after the pull back of course, and a couple of higher lows. This assumes this low holds at 275. 

Providing this happens I think we ultimately get back to the rally and a new high, maybe before the end of this month or the next.  

But until then I am banking a bit on us trading within a range from 275 to around 283. 

Since I am net long the SPY I am selling call credit spreads every time we have an intra-day rally. At the end of the day and selling occurs these spreads fall in value. 

Should we have more of a pull back, I will sell corresponding put credit spreads expiring on the same date as the call credit spreads and thus create iron condors for that date. 

Stocks can go up or go down or they can do the unthinkable. They can go sideways.  

Hello Friend. Trading a bit of $SPY today and doing a bit of housecleaning.

So, I’ve begun watching Mr Robot from the beginning. I’ve already seen Season 1 and 2 but forgot enough that I need to re-watch before seeing Season 3. Damn, it’s a good show. BTW Season 1 and 2 are on Amazon Prime Video. Should you need some entertainment. During SXSW in 2016, the show came to Austin setting up a ferris wheel downtown for a week. 

Today, Jerome Powell, testified before the House. During that testimony he sounded a bit more hawkish than his predecessor, Janet Yellen. That was enough to get the credit market’s panties in a wad, or I should say it set off the algorithms to sell the $SPY. We gave up a good bit of the gains made yesterday. The VXX shot up 9.5% and SPY was down 1.25%. After hours the SPY took back 0.32% but before you get too comfortable, the futures are down 0.21% tonight. 

I don’t think anything has fundamentally changed. I think this was algo driven. The market changed too quickly and there was no other real news to drive it.  

In my less risky, SPY trading account I did very little, getting a little bit longer and trading out of some put spreads at a small profit. 

In my speculative account I added just a few new long positions in AMZN and opened a few put calendars in AAPL and GOOGL. 

Mostly I just did some housecleaning. 

One technique I use is selling a credit spread for the following week if I am short either a put or call that expires this week and its close to the strike. This way I can close it out on Friday and sell the long call or put I bought this week to offset it.  

I’ll try to give a real-world example of this in the next few days.  

My YTD performance and reviewing Options Action and Fast Money from 2/9/2018


In an earlier post, I shared my one-year performance in my two active trading accounts, one is a retirement account and the other is taxable. 

I call my retirement account my speculative account and I call my taxable account my less risky account. 

In the speculative account I trade large volumes of options. Fidelity loves me, even at $4.95/trade. I have about 25 names going. Last year I made about 75% in this account. 

In the less risky account I trade SPY and call and put options on SPY. Last year I made about 35% in this account. 

Here’s my YTD performance for these two accounts after this draw down: 

Speculative – down 7.37 % 

Less Risky – down 19.17% 

Ouch! Funny the difference, right? Is Less Ricky really less risky based on these numbers? 

BUT, remember volatility is WAY, WAY up which means the bid/ask spreads are much higher in options, particularly put options which greatly exaggerates these numbers.  

Also, I have/had a great deal of working calendar spreads in the speculative account which is the PERFECT thing to have on going into a volatility spike. On Friday a bunch of the short legs of the spreads went to 0, most of the credit spreads went to 0 too. I either rolled them up and out, or just held on to the longs over the weekend. 

Which brings me to yesterday’s Fast Money and Options Action. I’m feeling a bit nervous as I agree completely with the ChartMaster’s analysis. I think we have hit the 200-day moving average in the SPY and reversed. I don’t think we get back to all-time highs within two weeks, but maybe in the course of a month? 

As to the other trades mentioned: 

XOM – I have not stock or options in this name, but I agree it may be time to change that. Mike’s trade of the March16 77.5/82.5 call spread for $120 looks good to me. Monday I am going to look into following him into that trade or maybe set up a April/March calendar spread. Will post it here if I do. 

F – no recommendation from Mike, but ChartMaster thinks the chart is similar to XOM above. 

WMT – Dan takes this name on and recommends selling a put spread, the March 97.5/92.5 collecting about $150 each (risking $500). I actually like this too, the exaggerated volatility means you can get more for these credit spreads than before. Calendar put spreads would work here too. I may look into buying one April 97.5 put, buying one March 92.5 put and selling two March 97.5 puts. I think this is called a long calendar put butterfly. 

VXX – Mike talked about this on OA and the other guys on FM too. Suffice it to say most agree it will be difficult for this to hold this level and I couldn’t agree more. I’m not going to bore you with recapping my VXX trades (and UVXY and SVXY) but one week ago these names (all long now) used to be about 7.5% of my speculative account is now about 12% of the account. Probably why the account got hit the least.

Thank goodness for my moron trade!