Weekend Portfolio Analysis (April 11, 2015)

Market Conditions

This past week the market retraced the past two weeks of declines with the SPX opening on Monday at 2064.87 and closing on Friday at 2102.06 up 37.19 or 1.8% on the week. Despite the dismal Non-Farm Payrolls report last Friday, the market opened strong on Monday. The major indexes are all, once again, poised to set new highs, having solidly broken above their moving averages and resistance levels. How the market continues to perform near-term will be greatly influenced by last quarter’s corporate earnings as earnings season gets fully underway next week. Analysts are forecasting a drop of -6% from first quarter 2014 results, which would make this the first negative quarter since 2012 and the worst quarterly results since 2009.


The oil slump also continues to put considerable pressure on the energy sector and US earnings as a whole.  In fact, if you were to exclude energy earnings results, overall earnings would forecast to rise 2%. Additionally, the strong US dollar continues to create significant headwinds for US corporations. About 40% of total earnings for the S&P 500 comes from international buyers. Not only are American goods more expensive overseas now with a stronger dollar, but US corporations are losing money every time they convert sales to US dollars.

Crude Oil closed Friday at $51.77 a barrel, up 4.65% for the week. On Tuesday, it traded as high as $54.13 only to give back all of the gains on Wednesday when the Energy Information Administration released it’s weekly data showing that inventories had rose by 10.9 million barrels from the previous week. This brings the total to 482.4 million barrels, the highest level for this time of year in at least 80 years.


The rebound in equity indexes also drove the CBOE Volatility Index (VIX) down, closing Friday at a new low for 2015 of 12.58.


Trade Activity This Week

On Monday, I closed the SPX Apr2 1975/1950 credit put spread for a $19 profit after commissions. This was not exactly the typical profit that I look for in these weekly trades, but with the less-than-stellar Non-Farm Payrolls report, I was concerned that the market might sell off strongly and I didn’t want the risk exposure on this trade. Any trade that can be exited for a profit after resort fees is a ‘win’ in my book. As luck would have it, the market did not react the way I had anticipated in response to the NFP report. This is precisely the reason I prefer to trade credit spreads as opposed to debit spreads.  With credit spreads your directional assumption can be wrong and you can still have a profitable trade. By contrast, debit spreads require that your directional assumption be correct.

On Wednesday, after the EIA crude oil inventories data was released, I closed the /CL Jun 71 call for a profit of $32.58 after commissions.  The profit on this trade was 40% of the total premium. I will close these higher risk trades once I have collected between 25-50% of the total premium. It is not worth the risk to hold this kind of trade for a long period of time or until expiration.

Also on Wednesday, after seeing how the market seemed to be gaining strength, I sold another weekly SPX vertical put spread. I sold the SPX Apr2 2030/2005 credit put spread for $0.45. On Friday morning, I closed it out for $0.05 generating a $37 profit in two days.

At the close of trading on Wednesday, I opened my second earnings trade of the season. In last week’s Weekend Portfolio Analysis, I indicated that I would be looking at Alcoa (AA) and Bed Bath & Beyond (BBBY) as possible earnings trade candidates.  The options in AA did not have rich enough premium to justify trading this underlying. However, BBBY had an IV Rank of 100% permitting a strangle with the short strikes located outside of the expected move. I sold the BBBY Apr2 81/72 strangle for $1.12.  At the open of trading on Thursday morning, I closed the strangle for $0.17 resulting in a nice $89 profit after commissions!

With crude oil volatility starting to show signs of contraction, I decided to sell a /CL Jul 75/30 strangle for $0.16 ($160 credit).  This is strictly to take advantage of theta decay which is approximately $8 per day.  I will plan on closing the trade after collecting 25-50% of the total premium.

Throughout the week I attempted to get filled on a longer-term credit spread in SPX with no success.

Plan For Next Week

The portfolio is currently over 65% in cash and is up 7.16% for the year versus 2.1% for the S&P 500 (see Trading Results).

As shown in the chart below, the Dow Jones Transportation Index made an impressive reversal this week having clearly rebounded off the bottom of the linear regression channel and rallying above the 8-day EMA. If this trend continues, it we should see the indices breaking through to all-time highs. However, I still am concerned about the strength of the economy and believe that a significant market correction will occur sooner than later.


With a large number of companies reporting earnings this next week, there could be some volatility introduced back into the markets should the results be worse than expected. Some of the companies that I will be watching for possible earnings plays next week are Intel (INTC), Johnson & Johnson (JNJ), J.P. Morgan (JPM), SanDisk (SNDK), Netflix (NFLX), and Goldman Sachs (GS).

As always, I will tweet out my trades when I make them so that readers can follow along. You can follow my live trades on twitter at: @abasmadjian.