Weekend Portfolio Analysis (July 25, 2015)

Market Conditions

The market giveth and the market taketh away. Last week the market posted solid gains, up 46.77 points (or 2.25%). This week the market gave it all back with the S&P 500 Index ($SPX) opening Monday at 2126.85 and closing Friday at 2079.65, down 47.2 or 2.22%. The yo-yo action has been the norm this year as the SPX has bounced between 2040 and 2135 for most of the year. With earnings season now in full swing and no major crisis on the horizon, the market gyrations are being ruled primarily by corporate earnings reports. This week the declines were the result of a series of earnings reports from widely-held companies that were deemed either not good enough, disappointing, or really disappointing. Apple ($AAPL) started off the week on Monday with its quarterly results exceeding expectations for both revenue and earnings per share. However, the margin by which they beat was not as large as quarters in the past resulting in a 7% drop in the stock. IBM ($IBM), Caterpillar ($CAT), and 3M ($MMM), which are also DOW components, also posted disappointing earnings setting the stage for the selloff. Biogen ($BIIB), a leading biotech, posted poor results and sold off 22% on Friday pulling down the biotech sector along with the rest of the market. Some stocks did post good results, such as Amazon ($AMZN), Startbucks ($SBUX), Juniper Networks ($JNPR) and Visa ($V), but it was too little, too late.


The SPX was unable to break above the 2125-2135 resistance zone and is now trading right at an area of intermediate resistance between 2075 and 2085. The 2040-2135 trading range continues to persist indicating a neutral trading environment.

Volatility remained at the low end of its range until Friday when the VIX momentarily spiked up to 14.73 and closed the week at 13.74.

Crude oil prices are officially in bear market territory as of Friday after four straight weeks of losses. /CL futures are off about 22% since their $61-a-barrel highs in June due to a continuing glut of crude supplies, a rise in domestic oil-drilling rigs and China-demand worries. /CL crude oil futures opened Monday at $51.11 and closed Friday at $47.97, down $3.14 (or 6.14%). Having broken through the key $50 support level has ushered in new short selling which is evident in the increased trading volume. There is now a possibility that crude oil prices will retest their prior low of $42.41 set back in the middle of March. September options are pricing in a 15% probability that these levels will be retested within the next three weeks.


Trade Activity This Week

I was kept busy this week with all of the companies reporting earnings. Earnings seasons offers the opportunity to trade high implied volatility binary events. This week was certainly not as profitable as last week due to many large outlier moves that exceeded the expected move priced into the options.

Monday after the close IBM reported earnings. Prior to the close I sold the Jul4 185/200/160/145 iron condor for $0.70. The next morning I closed the trade by buying back the position for $0.29. This resulted in a small $29 profit (2.03% return on capital) after commissions.

On Tuesday, Microsoft ($MSFT) reported. I sold the Jul4 47 straddle for $2.35. Typically when IV Percentile is above 75%, I will choose to sell the straddle as opposed to a strangle. In this case, that proved to be a good way to play the trade. The next morning I was able to buy back the straddle for $1.35 which net me a profit of $94 (7.83% return on capital) after commissions.

Under Armour ($UA) reported after the bell on Wednesday. I sold the Jul4 97/82 strangle for $1.05. The next morning I closed the position for $0.67 resulting in a $33.50 profit (3.19% return on capital) after commissions.

Also on Wednesday, Sandisk ($SNDK) reported. I sold the Jul4 58/60/50/48 iron condor for $0.62. The stock moved well outside its expected move resulting in a full loss of $147 after commissions. As a hedge I sold the Jul4 63 put for $0.58 which ended up being a mistake. On Friday I rolled the Jul4 63 put out to the Aug 60 put taking in an additional $0.44 in premium. If the Aug 60 put expires out-of-the-money, I will have reduced the loss in SNDK to about $50.

On Thursday there were many earnings candidates that reported after the bell. The most attractive trade was Skyworks ($SWKS). I was able to sell the Jul4 115/90 strangle with the short strikes being out more than two times the expected move. I collected $1.19 for the strangle and closed it on Friday for $0.06 resulting in an easy $107 profit (9.3% return on capital) after fees. Also I sold the Jul4 102/104/84/82 iron condor in Trip Advisor ($TRIP) for $0.62. TRIP missed earnings and moved down to the short put and I was lucky to close the position for $0.40 taking in a small $7 profit (4.86% return on capital) after fees. Next was Juniper Labs ($JNPR). I sold the Jul4 26.5 straddle for $2.04. Again, the IV percentile was extremely high, hence the choice of a straddle. The earnings beat estimates and the stock spiked up well outside my breakeven point. However, I eventually was able to close the position for a very small loss of $9.00 after commissions. Then there was Pandora ($P). Again, real high implied volatility with this one so I sold the Jul4 14 straddle for $1.36. The earnings report was positive and the stock traded up more than two times the expected move. I rolled the 14 call to August and sold the Aug 15 put resulting in an additional credit of $46. I now have an inverted strangle. If the stock pulls back between 14 and 15, I should be able to exit the position for a scratch or slight profit. Only time will tell. Overall for the week, all of the earnings trades resulted in a net profit of $6 after commissions. Should the hedges on P and SNDK work out, it should increase that a bit. However, as far as I am concerned, the week was a total bust.

In addition to earnings trades, I added to my /CL positions since implied volatility has once again picked up in crude oil. On Wednesday I sold a /CL Sep 52.5/53.5/47.5/46.5 iron condor for $0.50. Usually I do not place /CL trades with the short strikes this close to the current price. This is a defined risk trade and it is truly a “risk one to make one” type of trade. The maximum profit is $500 and the maximum loss is $500. The trade only has 24 days remaining until expiration and as soon as the volatility contracts a bit, I will close it for whatever profit I can get. My goal is to pull about 25% of the max profit out of the trade. Crude has continued to fall since placing the trade and is getting very close to my short put. Since it is an iron condor, the loss is only a few dollars right now, but as a hedge, I sold a Sep 55 call for $0.20 which will offset a portion of the loss if this trade goes against me completely.

Also on Wednesday, I closed the /ES Dec 2325/1450 straddle that I sold at the end of June when the markets tanked and IV Percentile spiked above 60%. The trade resulted in a $159.36 profit (20.6% return on capital) after commissions. This is the real beauty of selling premium when implied volatility is really high – the trade can usually be exited profitably shortly after it is placed. In this case, the trade was on for only three weeks.

On Friday, as the market was selling off into the close, I sold another /ES Dec 1450 put for $3.00. Implied volatility is not nearly as high as it was the last time I placed the same trade, but it is higher than it has been the past several weeks.

Plan For Next Week

Despite the miserable performance in this week’s earnings trades, July is still proving to be one of the best trading months I have had. The portfolio is currently over 40% in cash. The decline in crude oil has increased the margin requirements for my positions significantly. Therefore, I am being careful about deploying further capital right now until I am able to exit some of the September positions. The portfolio is up 34.41% for the year versus 1.01% for the S&P 500 (see Trading Results).

It will be interesting to see how the equity markets open up next week. Additionally, I will be watching my crude oil positions like a hawk in case /CL continues to slide.

Have a great weekend!