Weekend Portfolio Analysis (July 11, 2015)

Market Conditions

The major indexes ended the week on an upbeat note with the S&P 500 climbing back above its 200-day moving average (2,056), ending the week little changed. The week was largely news driven with China and Greece in the spotlight. On Sunday night, an overnight slide in the futures market resulted after the Greek referendum produced 61.3% ‘no’ vote, rejecting the bailout terms previously proposed by Eurozone creditors. The Shanghai Composite lost 5.9% on Wednesday, which triggered more volatility in the U.S. markets. However, later in the week, the U.S. markets rebounded in response to apparent stabilization of the Chinese stock market as officials in China introduced additional measures aimed at halting the market plunge by targeting “hostile short-sellers”. Elsewhere, remarks from top Eurozone officials also contributed to investor optimism as Greece announced its plans to submit concrete, realistic reform proposals. The $SPX opened Monday at 2073.95 and closed Friday at 2076.62, up 2.67 or 0.13%.

Chart_071015_SPX

The SPX traded down as low as 2044.02 on Tuesday, and has support in the 2040-2050 area. Overhead, there is resistance at 2080-2085, where most trading days in the last week have topped out. The intraday swings have been significant with every day this week experiencing between 20 and 33 point moves. Of particular interest are the massive overnight moves that have occurred the last three days this week. In the chart below, the arrows indicate the large overnight swings.

Chart_071015_SPX_5m

Volatility expanded again this week with the VIX peaking at 20.05 on Thursday, its highest point since February 2. On Friday, the VIX contracted significantly, closing the week at 16.83.

Crude oil prices continued to slide this week. On Wednesday, the Energy Information Administration reported an increase of 400,000 barrels (1.1 million decrease was expected) in crude supplies for the week ended July 3. The unexpected inventory rise added pressure to the crude oil glut market. Speculation of slowing crude oil imports from China along with the the possibility of Iran’s oil embargo being lifted also helped to keep prices under pressure. /CL crude oil futures opened Monday at $54.90 and closed Friday at $52.82, down $2.08 (or 3.79%). $50 appears to be a key support level for /CL with $55 being the new resistance level.

Chart_071015_CL

Trade Activity This Week

The increased volatility continues to offer opportunities to place new high-probability trades. The trade-off is that trades which were placed before the volatility expansion occurred are currently under water and will not be profitable until either 1) time decay occurs, or 2) volatility contracts. This is discussed in more detail in the article titled, Volatility is Back. As a result of increased volatility (which also increases margin requirements on futures options), I have been careful not to continue adding positions that may potentially require substantial margin maintenance requirements if volatility expands further.

I did make some adjustments to existing trades. These adjustments were detailed in the article entitled, Option Trade Adjustments, so I will not review them here.

With crude oil making new lows and volatility expanding significantly, I placed a couple of defined-risk trades in /CL. On Thursday, I sold the /CL Aug 15 49/48 credit put spread for $0.09 ($90 credit received). Early on Friday, I added to the position and sold a second vertical spread for $0.12 ($120 credit received). By the close of trading on Friday, both spreads were showing a positive P&L, and the spread that was sold earlier in the day was at nearly 50% of maximum profit.

With SPX rallying during the middle of the day on Friday, I decided to sell a call spread. I much prefer to sell put spreads as opposed to call spreads because they are easier to manage when the trade goes against you. However, I have a portfolio with a lot of long deltas right now. To hedge this, I decided to sell the SPX Aug 15 2115/2120 credit call spread for $2.15.  This trade has only about a 68% probability of profit, however, the total capital at risk for the trade is only $285. This is a short-term hedge in the event that the markets experience a severe decline Sunday evening going into Monday morning. I do not plan to be in the trade very long and, in the event that the market opens up real strong on Monday, the loss will be more than offset by my other positions. This is not a trade I would make as a standalone position. It is simply a short-term hedge against a portfolio that has excessive long deltas right now.

Right before the close of trading today, I was able to close the /ZB Sep 170 call that I had sold last week for a nice $56.66 profit (19.88% return on capital) in just 7 days. This was the only closing trade this week.

Plan For Next Week

The portfolio is currently 40% in cash. The portfolio is now up 28.58% for the year versus 0.86% for the S&P 500 (see Trading Results).

Next week is options expiration, so I will be closing quite a few positions. I believe that the July TLT position will be close to a full winner. Unfortunately, I will be taking about a $150 loss on the FXI position that expires next week. The two /CL vertical put spreads that I sold this week will expire on Thursday, but I plan to close them out early in the week. At this point, it is anyone’s call as to whether or not I will be assigned 100 shares of SKYW stock next week. Either way, I have reduced my cost basis by selling puts and calls around that position.

Have a great weekend!

  • Jonathan

    What about buying a debit put spread instead of selling a credit call spread? It would essentially do the same thing and result in much higher ROI if market goes down next week. Your max loss will be the amount you pay for the debit put spread. You could have bought 3 contracts of SPY Aug 200/198 debit put spread for .36 debit last Friday. It will cost you about $108. This will be at least a double if we tumble down to 2040-2050 area next week.

    • Aram Basmadjian

      Jonathan, you make some excellent points and very possibly your suggested will be more profitable and/or less risky than the trade I chose. I am not a fan of debit spreads, probably because I have had such poor luck trading them. As a result, debit spreads are usually the furthest thing from my mind when digging into the toolbox. Additionally, SPY is my achilles heel. I realize that SPY and SPX are essentially the same except for size. However, I have not had much success trading SPY. It is for these reasons that I chose the path that I did. That is one of the wonderful things about trading – there are so many different ways to construct a trade that can express essentially the same opinion.