Weekend Portfolio Analysis (August 8, 2015)

Market Conditions

The markets have remained in a narrow range awaiting each piece of news to determine the probability of a rate hike in September. The latest news impacting the odds have been: hawkish comments by Fed Bank of Atlanta President Dennis Lockhart, a strong report on U.S. service sector growth, and the July Nonfarm Payrolls report which was good enough to leave the door open for a fed funds rate hike in September. All of this resulted in the major averages closing out the first week of August on a lower note. The S&P 500 Index (SPX) opened lower on Monday at 2104.49 and closed Friday at 2077.57, down 26.92 or 1.28%.


Once again, the SPX continues trading in the 2040-2135 range giving up all of the gains from last week. Despite the declines this week, volatility remains relatively muted. In fact, the VIX dropped to its lowest point in 2015 on Wednesday – 10.88. During the week the VIX did get as high as 14.58 and closed out the week at 13.39.


Crude oil continues to make new lows as West Texas Intermediate crude settled below $44 for the first time since March on Friday, pressured by tumbling gasoline prices as the approaching end of the U.S. summer driving season suggested a growing surplus in fuel supply. Also weighing on prices was the latest rig count from Baker Hughes, which showed U.S. energy firms added 6 oil rigs this week, continuing a recent trend of increases, even after crude oil prices dropped over 25 percent from a recent high in June. Add to that a strengthening dollar which also put pressure on crude oil prices. /CL crude oil futures opened Monday at $46.86 and closed Friday at $43.75, down $3.11 (or 6.64%).


Trade Activity This Week

The week was fairly active for trading, but not as much as the previous two weeks. Many of the trades this week were adjustments or exiting out of existing positions.

I started off the month of August with a bust. The substantial drop in crude oil caused the short put of the /CL Sep 54.5/43 strangle to be in jeopardy of being breached, I decided to close the position at a loss of $384.24 and opened a new strangle utilizing the 53 and 38 strikes. This new strangle will reduce the loss by about 50% if I am able to hold it to expiration, which is only nine days away. Overall, the options on the September futures contract have been profitable, even with this loss. Once the September contracts are completely closed, I will do a blog article on this position and all of the adjustments.

On Monday prior to the close, I placed two earnings trades. In Coach (COH), I sold the Aug1 30 straddle for $2.71 and closed it Tuesday morning for $2.34 resulting in a $31 profit (5.04% return on capital) after commissions. I also sold the Aug1 20 straddle in MGM for $1.26 and bought it back for $0.93 which net me a $27 profit (6.75% return on capital) after commissions. These were obviously not big winners, but it helped to offset a bit of the loss in crude oil.

On Tuesday, I closed the /ES Dec 15 1450 put that I had sold less than 30 days prior for an $82.18 profit (20.44% return on capital). Additionally, with the implied volatility continuing to increase in crude oil, I sold the Oct 30 put for $0.04. Before the close on Tuesday, I placed an earnings trade in Zillow (Z). I sold the Aug1 85/65 strangle for $1.80 and bought it back on Wednesday morning for $0.80 which resulted in a $94 profit (12.37% return on capital).

On Wednesday I also closed out the /NG Sep 2.5/2.4 put vertical that I sold about three weeks prior. This trade net a profit of $55.76 (16.9% return on capital) after fees. Before the closing bell on Wednesday, I placed two final earnings trades for the week. The first was 3-D Systems (DDD) Aug1 12 straddle which I sold for $1.52 and bought back the next day for $0.75. The profit on this trade was $71 (29.96% return on capital). The second earnings trade was Transocean (RIG) Aug1 12 straddle which was sold for $1.05 and purchased back for $0.82. This trade was barely profitable netting a gain of $17 (6.67% return on capital) after commissions.

On Friday, with the decline of the S&P 500 below the 2070 level, I sold the /ES Dec 1600 put for $5.25. Also, I closed out the Pandora (P) Aug 15 put for a $21.00 profit and sold the Aug 18 put for $0.62. These are hedges to offset the loss from the earnings trade in Pandora that I did several weeks ago.

Plan For Next Week

August started out a bit rough having to take the loss in the /CL position. However, I am confident that overall, the September crude oil contracts will be profitable once all of the positions are finally closed out over the next week and a half. The portfolio is up 39.37% for the year versus 0.91% for the S&P 500 (see Trading Results).  The portfolio is currently over 50% in cash. Due to the close proximity of expiration on the September crude oil positions, the margin requirements are quite high. Once those positions are closed, the portfolio will be over 80% in cash.

Have a great weekend!