Weekend Portfolio Analysis (September 12, 2015)

Market Conditions

The markets ended the abbreviated trading week on a higher note, but not without some mid-week volatility. The large intraday swing during Wednesday’s trading emphasizes that the volatility in the market has not dissipated. The main driver of this week’s volatility is the buildup to next weeks FOMC meeting. To raise or not to raise? That is the question on everyone’s mind. The S&P 500 Index (SPX) opened on Tuesday at 1927.3 and closed Friday at 1961.05, up 33.75 or 1.75%.


The chart above still appears to be bearish, however everything could change after the Fed announcement on Thursday. Regardless of what the Fed does with regards to interest rates this coming week, the market appears quite anemic. Taking a look at individual sectors within the S&P 500 such as the financials (XLF), energy (XLE), technology (XLK), consumer discretionary (XLY), consumer staples (XLP), healthcare (XLV), materials (XLB), and industrials (XLI) all reveal charts that look very weak. In fact, the only sector that is showing some strength right now is the home builder sector (XHB).

The VIX has averaged around 20 since the product was introduced in 1990. It has traded below 10 and up to nearly 80 during the crash in 2008. Last month, it briefly traded at 53.29 and this week it has been trading between  21.51 and 27.22 closing towards the lower end of that range at 23.7. The VIX is definitely trending lower, although I think that next week could result in some increasing volatility again.


Crude oil traded in a much narrower range this past week with a low of $43.36 and a high of $46.41. /CL futures closed the week on Friday at $44.78, down $1.04 or 2.27%. The EIA reported Thursday that oil inventories rose by 2.6 million barrels, higher than previous estimates. Goldman Sachs is now forecasting oil prices could drop as low as $38 per barrel within the next month as a result of the oil market being even more oversupplied than originally thought.



Trade Activity This Week


I made only one trade this week, a straddle in /ES. Details of the trade were posted earlier this week in the article entitled Trading Straddles in /ES. The trade has really whipsawed me around this week with daily P&L varying from a profit of $200 to a loss of nearly $900. When these straddles are in their infancy (within the first week of establishing the trade), it is easy to get wild excursions on the P&L until theta and/or volatility has has time to do its work. In the case of this particular trade, volatility as not contracted at all since the trade was placed. The protective put that was added to this straddle (due to my concern about another retest of 1830 levels) has actually been a hindrance to exiting this trade rapidly and profitably. Had the protective put not been added to the trade, I could have exited the trade earlier this week for a significant profit. With volatility starting to contract, I may consider not adding the protective put the next time I place one of these trades. The other option would be to place the protective put further out-of-the-money.

Plan For Next Week

I will be looking for an opportunity to close out my two /CL positions this coming week. Both positions are currently at about 40% of maximum profit. I will also be watching the /ES straddle carefully and, should the opportunity arise to exit the trade profitably prior to Thursday, I will seize the opportunity.  Should I be unable to exit the position before the Fed meeting and the market rallies significantly as a result of the announcement, I am prepared to purchase an /ES contract to hedge the straddle.

The portfolio is up 23.82% for the year versus down 4.75% for the S&P 500 (see Trading Results).  The portfolio is currently 65% in cash.

  • Jonathan

    You did not include a link to ‘Trading Straddles in /ES’.

    • Aram Basmadjian

      Fixed. Thanks for bringing this to my attention, Jonathan!

  • Jonathan

    I also want to thank you for including my FB page on your Options Trading websites section. Your site is great and it looks like you are building some momentum.

  • Hey Aram, I went through the TT slides on straddles and they’re interesting. I’m primarily a Butterfly trader so ATM strategies are always interesting to me and I’m looking forward to seeing how your straddle plays out. I’m not very familiar with options on futures, but why /ES options rather than SPX?

    I wonder if part of the IV situation with your straddle has anything to do with the Fed. Specifically, I wonder if we’re seeing some elevated IV due to that uncertainty about the announcement and the recent large moves. My hope is that it ends up being much ado about nothing. Guess we’ll see.

    • Aram Basmadjian

      Dan, thanks for your comment. It is an honor to have you as a reader. I have been enjoying the articles on your blog since recently being introduced to it by The Lazy Trader.

      I trade options on /ES as opposed to SPX simply because of the lower margin requirement for naked positions on /ES. For example, an ATM straddle in SPX generates about $10,000 in premium and requires about $39,000 in buying power reduction. The same ATM straddle in /ES generates about $5,000 in premium and requires $3,400 in BPR. An ATM straddle in SPY generates the least amount of premium ($1,000) and requires about $3,900 in BPR. This is with a standard margin account (I do not have portfolio margin). As you can see, the /ES trade offers the best leverage for someone without portfolio margin.

      Even when trading credit spreads, there can be advantages to trading /ES. For example, a 25-pt wide credit put spread in SPX where the short put has approximately an 84% chance of being OTM, requires $2,500 in BPR less the amount of credit received (approx $2,200 BPR). The same spread in /ES options can require significanly less margin (maybe only $300-400, or, possibly no buying power reduction depending on what other positions you are currently holding in /ES).

      The disadvantage of trading /ES options is that the commissions can be significantly higher depending on your trading volume, broker, etc.

      • Hey Aram,

        Thanks so much for the kind words. Incidentally, I found out about your blog through the Lazy Trader as well so I guess we can both thank him! I was immediately interested in what you’re doing because I saw you trading options on /CL, which is pretty uncommon.

        What you’re saying about the futures options is very interesting and something I didn’t realize. It sounds like there are totally unique margin requirements for options on futures. When you look at the premium relative to the leverage, trading them definitely makes sense. As you’ve pointed out, the main downfall is that you pay a higher commission rate (I think it’s $3.50 per contract at TOS). For naked options, the higher rate is slightly less of an issue.

        I think the big bonus is that trading options on futures opens up a wide range of markets, namely commodities and interest rates, for trading.

        Thanks for the insight and feel free to get in touch anytime.