Weekend Portfolio Analysis (September 5, 2015)

Market Conditions

The markets ended the week on a defensive note heading into the three-day holiday. Friday’s retreat was also fueled by economic reports including the Non-Farm Payrolls report for August which came in below expectations (173,000 vs. 217,000 expected). This in itself would be good news for those investors concerned about a Fed rate hike later this month. However, better than expected hourly earnings growth (+0.3% vs. +0.2% expected) and a drop in the Unemployment Rate to 5.1% means that there is still a possibility that the Federal Reserve will raise the federal funds rate as early as this month. The S&P 500 Index ($SPX) opened on Monday at 1986.73 and closed Friday at 1921.22, down 65.51 or 3.29%.


We are in a short-term oversold condition. Of course, that does not mean that we won’t re-test the 1870 low set last week or continue down to test the October 2014 low of 1820 which is the next support level. Yet despite all of the volatility, the SPX has traded in a new range for the past couple of weeks between 1870 and 1990. The SPX chart is bearish in that it is trending steadily lower.

The VIX remains elevated as it trades in a range between 23.45 and 33.82. It closed on Friday at 27.8. The trend of the VIX is still rising which is also a bearish indicator. Until the VIX begins to consistently trade below about 19, we are likely to see large movements during each trading day.


Crude oil experienced a volatile week as it continued to rally early in the week with new data indicating that U.S. drillers had actually pumped less oil than originally thought. Additionally OPEC made noises mid-week about cutting production. However, continued concerns about the slowing economy in Europe and China put downward pressure on the black gold. /CL crude oil futures opened Monday at $45.00 and closed Friday at $45.77, up $0.77 (or 1.71%). The real story is what it did during the week with a high of $49.33 and a low of $43.21.



Trade Activity This Week

This week was a quiet week for trading. Returning from vacation, I decided to step gingerly back into the market. The first thing I did Monday morning was to sell an /ES Dec 1000 put for $1.60 ($80 credit received). I think this is a relatively low risk trade at this point and with the volatility so elevated, these puts are fetching more than double the premium they would normally. Additionally, with the volatility so high in crude oil, I also sold a /CL Nov 70 put for $0.13 ($130 credit received). I was able to close the /CL put the next day for a $52.88 profit (7.52% return on capital). Not bad for a one day return.

On Tuesday, I sold a straddle in Transocean Ltd. ($RIG). This company is a Swiss oil driller and the volatility (as with many companies in the oil services industry) is at an extreme. Normally I do not trade individual company options (except for earnings), but this is simply another way to play the spike in volatility of crude oil. I sold the Oct 14 straddle for $2.89 ($289 credit received). I will look to close this when I have received 25% of the potential profit.

Also on Tuesday I tried something new. Readers of this blog will think that I have lost my marbles, and just perhaps this is a bit of “revenge trading” as I try to recoup losses from last week. I sold… wait for it… an /ES Oct 1920 straddle for $136 ($6,800 premium received). Yes, you read that correctly. As the market has started to trade a bit more orderly and with volatility still so inflated, I just could not resist. I put in a Sell Stop order of an /ES future contract at 1850 just in case all hell broke loose which would completely hedge the position if the bottom started to drop out. So, how did that work out? I closed the position on Friday for a $689.36 profit (24.23% return on capital) in just 4 days. Volatility did collapse a small bit from Tuesday which is why I was able to get out of the trade so quickly with such a large profit. By the way, for those that are interested, the margin requirement for the trade was only $2,845. I did not post the trade on twitter when I made it because it was an experiment and I did not want to lead those readers that follow my trades into a potential trap. Will I try this again? Probably.

On Thursday, I also opened a new strangle in crude oil. I sold the /CL Nov 70/30 strangle for $0.10 ($100 credit received). Again, with volatility so high, I feel that I have to take advantage of it.

Plan For Next Week

August is closed out and was my worst trading month ever with a loss of $2,282.90 after commissions. September has started off strong and the portfolio is now up 23.82% for the year versus down 6.69% for the S&P 500 (see Trading Results).  The portfolio is currently 85% in cash.

Have a great holiday weekend!

  • Jonathan

    Nice trade on /ES. That took a lot of guts. Congrats on the great yearly return. I am also up this year but not as much as you are. I enjoy reading your weekend analysis as it is so well written.

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