Weekend Portfolio Analysis (July 18, 2015)

Market Conditions

The major indexes posted solid gains this week as a result of both global events and higher-than-expected earnings results. Overseas, Greece capitulated and agreed to the austerity program offered by its creditors. In China, the stock market has pulled out of a three-week tailspin and their markets rebounded this week. The Nasdaq Composite ($COMP) received a boost from Google ($GOOGL) after the jumbotron stock reported better than expected earnings. The stock soared over 16% to a new record high which, in turn, lifted the COMP to a new record close of 5,210.14. The S&P 500 Index ($SPX) opened the week on Monday at 2080.03 and closed Friday at 2126.8, up 46.77 or 2.25%.


The SPX broke through a key resistance area between 2080-2085 on Monday moving above 2100 during the week. It is now trading solidly above all of the key moving averages (8 EMA, 13 EMA, 21 EMA, 34 EMA, 50 SMA and 200 SMA). We will have to wait until next week to see if the SPX can break through the next resistance area of 2125-2135.

Volatility rapidly contracted this week reverting back to the mean. The VIX opened the week at 15.29 and closed on Friday at 11.95. The VIX traded as low as 11.77 on Friday, its lowest point during 2015. The volatility expansion over the last couple of weeks was significant, but short-lived (5 trading sessions with the VIX above 19) stressing the importance of maintaining a significant level of cash that can be deployed quickly when the expansion occurs.


Crude oil prices came under pressure from a stronger dollar and expectations of increased exports from Iran, resulting in a third week of losses. On Wednesday, the EIA (U.S. Energy Information Administration) published its weekly crude oil stocks report. U.S. crude oil inventories at Cushing, Oklahoma, increased for the third straight week to 57.1 million barrels for the week ended July 10, 2015. /CL crude oil futures opened Monday at $52.15 and closed Friday at $51.11, down $1.04 (or 1.99%). $50 still appears to be a key support level for /CL with $55 as the upward resistance level.


Trade Activity This Week

With the official start of earnings season, options expiration and the huge contraction in volatility, this week was the busiest trading week I have had this year – 20 trades! I opened a few new trades and closed a lot of existing trades, freeing up quite a bit of capital.

On Monday I had a pleasant surprise when I turned on the computer in the morning. A GTC order had triggered and closed out the /ES Jul 15 (EOM) 1900/1850 credit put spread for a $31.26 (6.25% return on capital) at 5:19am. You just can’t beat making money while you are sleeping, even if it is only $31! This trade was held a bit longer than originally anticipated. Shortly after placing this trade is when the volatility spiked requiring me to wait for the volatility contraction before the trade could become profitable.

Last Friday I sold an SPX Aug 2115/2120 credit call spread. After tweeting out the trade, several followers messaged me to make sure that I had not lost my marbles. The trade was a speculative hedge in the event that the Greece situation worsened over the weekend. As it turned out, the situation in Greece improved and the market began to ascend on Monday morning. Shortly after the open, I sold the position for a $41 loss which proved to be the right decision.

I was also able to close the two /CL Aug 49/48 credit put spreads on Monday that I had sold the week prior. Between both positions, the net profit was $101.52 (15.4% return on capital). These two positions were my first foray into using a defined-risk spread with /CL options. Previously, I have always traded /CL using naked options. I am not sure why it did not occur to me before this time to trade spreads. Even when using spreads, /CL offers great leverage and by defining the risk, I am able to sleep much better at night! Of course, spreads are more costly with regards to commissions and they are not quite as easy to adjust, but there certainly is something to be said for the peace-of-mind they provide. With volatility still relatively high in crude oil and having just closed these two positions, I decided to sell the /CL Sep 51.5/50 credit put spread. I sold this spread a bit closer to the money, but I thought that oil was close to a bottom. For protection, I sold a /CL Sep/Oct futures calendar. As it turned out, my assumption was wrong and crude continued lower. Over the next twelve hours I unwound the entire trade (vertical & calendar) for a quick $31.52 profit (5.1% return on capital).

Finally, on Monday I also sold an FXI Jul 42/38 credit put spread as a hedge to generate additional premium for the iron condor position which was proving to be a problem trade. On Tuesday, I closed the FXI Jul 42/53/48/43 iron condor. After closing the additional hedge position on Wednesday (which ended up not working out), the total loss for all the FXI trades after commissions was $226.

On Tuesday I also closed the TLT Jul 123/126/114/111 iron condor for a $44.50 profit (19.18% return on capital). I could have allowed it to expire, but TLT had started moving towards the short put and I was not sure if it would reverse direction. Rather than gamble, I took the profit leaving less than $24 on the table.

Earnings season is in full swing and Tuesday presented two opportunities that met all of my criteria – YUM and CSX. With YUM I sold a wide 100/83 strangle and closed it out on Wednesday morning for a quick $49 profit after fees (4.83% return on capital). With CSX, I chose to sell the 33 straddle, collecting enough premium to put the breakeven points outside of the expected move. This trade was closed for a $62 profit (9.6% return on capital). On Wednesday afternoon before the close, I placed two more earnings trades. I sold an INTC Jul 29.5/33/29.5/26 iron condor. I had originally planned to sell the Jul 29.5 straddle, but the wings were only a couple of pennies each, so I went ahead and bought the insurance for almost nothing. Thursday I closed the trade for a $49 profit (22.58% return on capital). I also sold an EBAY Jul 63.5 straddle. EBAY moved well outside the expected move at the open and I closed the trade for a $25 loss after commissions. Had I held onto it a bit longer, I would have been able to close the trade for a full profit, but hindsight is always 20/20 and with earnings trades, it usually works out best to close them early, especially if they are moving against you.

On Thursday morning when I woke up and looked at the ThinkOrSwim platform, I noticed that the /ES Sep 1800/1750 put credit spread GTC order had triggered at 4:35am resulting in a $64.36 profit (21.6% return on capital). I could really get used to being paid to sleep!!! Also, right at the open of the market at 9:30am, another GTC order triggered closing out the TLT Aug 117/127/117/107 iron butterfly for a $93 profit (18.79% return on capital). Thursday afternoon I was excited about the possibility of putting on an earnings trade in GOOGL. However, no matter how I structured the trade, there was just nothing that met my criteria. I am so thankful that I stuck to my “rules” and did not put the trade on. It would have been a disaster! After seeing the tape action on GOOGL after earnings, it is now on my no-fly list for earnings trades (along with NFLX, CMG and PCLN).

On Friday, I closed the call side of the /CL Sep 64/43 strangle. The call was almost at full profit so I took that half of the position off for a $112.88 profit (17.1% return on capital). I also bought back my short SKYW Jul 15 put that was in-the-money for a $17 profit (6.25% return on capital). Rather than be assigned the stock, I closed the position profitably and sold an Aug 15 put for $1.00. If I am eventually assigned the stock, I will have significantly reduced my cost basis.

Having freed up a lot of capital, I looked for areas to put on new positions. Crude oil still has a fair amount of volatility as does Natural Gas (/NG) and Corn (/ZC). With crude trading close to the low end of its recent range on Friday, I sold another vertical put spread. This time I sold the /CL Nov 41/39.5 credit put spread for .15 ($150 credit received). The max risk on a 1.5 wide spread is $1,350 ($1,500 less the $150 credit received). However, it only requires $225 in buying power to place the trade. This is one of the benefits of trading options on futures. Along the same lines as crude oil, natural gas is trading near its historical lows. I decided to sell the /NG Sep 2.5/2.4 credit put spread. The .1 wide spread is equivalent to $1,000 of risk.  I sold the spread for .12 or $120 credit reducing the risk of the trade to $880. The buying power reduction on this trade was $330.


Plan For Next Week

July has been a terrific month for trading thus far. The current P&L for July has been exceeded only by the month of May. Despite Friday’s new positions, the portfolio is currently over 65% in cash. The portfolio is up 32.76% for the year versus 3.29% for the S&P 500 (see Trading Results). This is a significant milestone for me personally. I have never traded as well as I have this year. My goal is generate 2% per month consistently. I have exceeded that all but two months this year, but overall am averaging over 4.5% per month!

Next week I will be looking for additional opportunities to place earnings trades. Additionally, I any expansion in volatility will be an opportunity to sell more premium.

Have a great weekend!

  • Jonathan

    That is a lot of trades for a week. You can quit for the rest of the year and still be ahead of 90% of all money managers. Kudos to you.