Weekend Portfolio Analysis (July 4, 2015)

Market Conditions

The markets were shaken this week after Greek leaders said “no” to the Eurogroup’s cash-for-reform proposal last weekend. Almost every major market closed down at least 2% on Monday. On Thursday, the Nonfarm Payrolls report for June missed estimates (223,000 vs. 230,000 expected) with the wage component showing no monthly growth. The S&P 500 opened Monday at 2098.63 and closed the abbreviated trading week on Thursday at 2076.78, down 21.85 points or 1.04%. The $SPX continues to maintain a strong support zone at the 2050-2070 level.


Crude oil prices tumbled this week to their lowest level in two months due to fresh signs of oversupply. U.S. crude oil stockpiles rose last week for the first time in nine weeks, according to the weekly report from the Energy Information Administration. That report came out just one day after data was released on Tuesday indicating that oil producers had ramped up output in April to the fastest pace since 1971. /CL crude oil futures opened Monday at $58.84 and closed Friday at $55.52, down $3.32 (or 5.64%).


Largest VIX Moves


Volatility was elevated all week with the $VIX trading as high as 19.8 on Tuesday. On Monday, the VIX, which measures the volatility of SPX index options, spiked higher by 34.45%. This was the eleventh largest single-day jump in the VIX since its inception. For those that missed it, I posted an article earlier this week on the subject, Volatility is Back.

Trade Activity This Week

The increase in volatility provided an excellent opportunity to sell premium. A significant portion of the portfolio has been in cash. Professional money managers and financial advisors often promote the concept of asset allocation as well as the importance of a diversified portfolio. However, they will rarely recommend that you maintain a cash position. However, for the options trader, cash is an important position to maintain, particularly during times of lower implied volatility. A cash position provides the trader the luxury of entering positions when it is most favorable and lucrative. With a large cash position, I was able to take advantage of the huge increase in volatility by opening quite a few new positions.

On Monday, I continued to “ladder” my /ES credit put spreads. This week I sold the Sep 15 1800/1750 credit put spread for $2.50 ($125 credit received). Normally I sell these credit spreads with a 95% probability of expiring out-of-the-money. However, in the case of this spread, I decided to collect a bit more premium and moved the short strike to a delta of -.10.

I also opened the first half of an /ES strangle. I sold the Dec 15 1450 put for $5.00 ($250 credit received). I positioned the short put at the 95% probability of expiring out-of-the-money.

Crude oil volatility began to expand again, so I took the opportunity to sell a /CL Oct 15 38 put for $0.09 ($90 credit received). Although I believe crude oil has the potential to move lower, I do not believe that it will get to this level. There is a significant amount of support at the 53-55 level.

On Tuesday, the market rallied, yet volatility continued to expand. This offered an ideal setup to open the other side of the /ES strangle. I sold the Dec 15 2325 call for $2.40 ($120 credit received). I now effectively have an /ES Dec 15 2325/1450 strangle with an entry price of $7.40 ($370 credit received). As this is a naked position, I plan to manage it early collecting between 25-35% of the total premium.

On Wednesday, crude oil volatility continued to escalate with the release of the EIA data. IV Rank exceeded 40% which was my cue to sell the Sep 15 73/43 strangle for $0.20 ($200 credit received). Again, I plan manage this undefined-risk position early.

The equity markets were closed on Friday, however futures continued to trade an abbreviated session.  30-year Treasury Bonds have rallied the past two days and have also had a fair amount of volatility recently. Today, as /ZB rallied strong above the 21-day EMA, I sold the /ZB Sep 15 $170 call for 0″07 ($109.38 credit received).

Due to the volatility expansion this week, I was unable to close any of my existing positions.

Plan For Next Week

Chicago-Fourth-Of-July-4The portfolio is currently 40% in cash. Due to undefined-risk trades currently in the portfolio, I do not plan to open any additional positions. The cash reserve in the account must remain in case margin requirements fluctuate on a daily basis. This Weekend Analysis officially brings another profitable month to a close. For the month of June, the portfolio was up 4.65% after commissions and is now up 25.59% for the year versus 0.87% for the S&P 500 (see Trading Results).

Next week I will look for opportunities to close positions if we see a collapse in volatility. I hope that everyone has an enjoyable and safe Fourth of July holiday!

  • Jonathan

    “A cash
    position provides the trader the luxury of entering positions when it is
    most favorable and lucrative. With a large cash position, I was able to
    take advantage of the huge increase in volatility by opening quite a
    few new positions.”

    Firstly, congrats on the first 6 months. In times of low volatility, I like to have a lot of cash. It gives me ample ammo when its time to pounce.

    • Aram Basmadjian

      That is so true, Jonathan! Congrats to you, too, on a well executed trading plan so far this year!