Weekend Portfolio Analysis (September 26, 2015)

Market Conditions

The roller coaster ride continued in the equities markets this week as the S&P 500 declined from last week’s high of 2020.86 all the way down to 1908.92 before rallying somewhat. The market gyrations were largely event driven. The week started with remarks from presidential candidate Hillary Clinton, who said she is interested in introducing price controls into the pharmaceutical industry. This resulted in the biotech stocks selling off sharply pulling much of the market with it. In addition, Thursday’s reminder from Janet Yellen about the potential rate hike by year’s end may have also factored into the selling considering that the biotech industry has benefited greatly from rock-bottom rates. Ongoing concerns about China’s economic growth contributed to increased volatility in commodities prices. The nearly 35% decline in Volkswagen stock due to the Department of Justice probe into the company’s diesel engines had ripple effects on all auto manufacturers, foreign and domestic. To top it all off, House Speaker John Boehner announced his resignation on Friday.  The SPX opened on Monday at 1,960.84 and closed Friday at 1,931.34, down 29.5 or 1.5%.

Chart_092515_SPX

On Wednesday the Energy Information Administration reported U.S. crude oil stockpiles fell by 1.9 million barrels in the last week, compared with analysts’ expectations for a decrease of 533,000.  The surprise decrease in crude inventories resulted in a short-lived rally in oil prices. However, weak data from China and historically high stockpiles continue to put pressure on the black gold. November WTI crude opened Monday at $45.31/barrel and closed Friday at $45.34, up $0.03 or 0.07%.

Chart_092515_CL

Trade Activity This Week

It was a very quiet trading week. I opened two new trades. On Monday, I sold another straddle in /ES (S&P 500 e-mini futures). The details of this trade are shown below:

Trade Details:

SELL 1 /ES Nov 15 1950 Call @ 60.50
SELL 1 /ES Nov 15 1950 Put @ 57.75

Credit: 118.25 ($5,912.50 per contract)
Max Risk: Unlimited (Breakeven Prices: 1831.50 / 2068.25)
Margin Required: $3,521.50
Days to Expiration: 60

This is the second straddle that I have attempted using S&P futures. This week’s trade has experienced a lot of excursions due to the extreme price movements in /ES over the past few days. In fact, it is interesting to see how /ES has traded over the past two days in this 2 minute chart. In just 18 hours, /ES dipped to 1897.25 and then ripped up 51 handles to 1951 before closing the week at 1915.25

Chart_092515_ES

Despite the volatility, this straddle is beginning to show signs of profitability as seen in the Risk Profile below. Although the P/L Open is not as impressive as it was earlier on Friday, it did end the week on a positive note. For more information on this strategy, refer to the article Trading Straddles in /ES.

Analyze_092515_ES

The second trade of the week was opened on Tuesday. As readers of this blog may be aware, I have an affinity for airline stocks, particularly that of my former employer, SkyWest Airlines ($SKYW). This is a stock I do not mind owning, and on a minor pullback on I decided to sell a put. If I am assigned the stock, I will continue to reduce cost basis by selling covered calls against it.

Trade Details:

SELL 1 SKYW Nov 15 15 Put @ 0.74

Credit: 0.74 ($74 per contract)
Max Risk: $1,426 (Breakeven Price: 14.26)
Margin Required: $177
Days to Expiration: 59

Plan For Next Week

I had planned to close the /CL strangle this week but was not filled on the order. I suspect that the trade will close early next week. I will also be monitoring the /CL strangle that I sold nearly two weeks ago. This trade is showing a nice profit now as the price of crude oil hovers close to the 45 strikes. Below is the risk graph for the combined strangle and straddle in /CL. Although the staddle is not quite at my optimum profit target (10-25% of max profit), this trade is doing very well.

Analyze_092515_CL

I will also be closely watching the /ES straddle. Although currently showing a small profit, that could change rapidly should the weakness in equities continue into next week. Friday’s failed rally along with persistent elevated SKEW readings (see below) have this trader concerned about the short-term future of this market.

The portfolio is up 26.38% for the year versus down 6.2% for the S&P 500 (see Trading Results).  The portfolio is currently 47% in cash.

Chart_092515_SKEW

  • Hey Aram. Are you targeting a specific $ gain/loss on the straddles you’re trading? I’m curious from a risk management standpoint. On that note, do you know about DTR Trading?

    http://dtr-trading.blogspot.com/

    If you don’t, make sure to check out Dave’s blog. He has a bunch of backtest results for Straddles, Strangles, IC’s, etc using different profit targets and risk management points. It’s a great resource.

    Good stuff, it will be interesting to see how things play out this week.

    • Aram Basmadjian

      Dan, thanks for sharing the link to Dave’s blog, DTR Trading. There is definitely some very good research on his site which I am currently reviewing.

      As for profit/loss targets on the strangles and straddles, here is how I am currently managing the trades:
      Strangles: Exit at 50% of max profit or 2x the credit received
      Straddles: Exit at 10-25% of max profit or 1.5x the credit received

      • Val

        Hi Aram,wondering if this means that if there’s a big move in the markets you don’t really “believe” in adjusting the challenged side of the straddle or strangle? Instead, you’d rather exit the trade… Thank you!

        • Aram Basmadjian

          Val, I have never had good luck with adjustment trades. In most cases, I would have been better off had I just closed the trade, took the loss and moved on. However, with the straddles utilizing futures options, it is possible to hedge the position by buying or selling the underlying future if it starts moving against you.

  • Jonathan

    I like your idea of selling a naked put on a stock that you don’t mind owning. You are essentially getting paid to wait for the price of the stock to come down to your desired price target. Selling covered calls on a stock you own is a viable strategy to make monthly income too. Good job.

    • Aram Basmadjian

      If I want to purchase a stock for my portfolio, I always sell a put. Conversely, when I want to sell shares from my portfolio, I sell calls against the shares. This strategy can be done in an IRA, which is a benefit.

      • The Lazy Trader

        I’ve been thinking about this idea for a while as a viable strategy. Only selling naked Puts on dividend stocks you don’t mind owning and always selling Calls immediately after you enter a long stock investment, to reduce your cost basis. You make money on the stock by constant covered call selling plus dividends collected while holding the stock, plus of course potential capital appreciation. Three forces. This strategy has all the ingredients for outperforming the markets long term with smaller volatility and draw-downs. There is an index called BMX which tracks the performance of a monthly covered called strategy on the SPX (I think it is the 1 strike out of the money Call) and this strategy outperforms the index easily in the long run. Put selling also outperforms in the long run although I haven’t seen a Put selling index yet similar to what they did on BMX. So combining both in the same strategy, adding to that the dividend component of solid names is bound to be a solid strategy,
        LT

        • Just a heads up on BXM, Invesco rolled out an ETF that I think is supposed to provide that type of exposure. The ticker is PBP. More here:

          https://www.invesco.com/portal/site/us/investors/etfs/product-detail?productId=PBP

          On put selling, check out the CBOE index PUT or my shameless plug.

          http://www.cboe.com/micro/put/

          http://www.thetatrend.com/writing-naked-puts-unspoken-challenger-buy-and-hold/

          I also want to throw another idea out there. Rather than using stock to sell calls against, why not a LEAP? It’s funny that you guys are discussing this because I started testing a leap write strategy using ThinkBack in TOS this past week. Basically I’m looking at buying a long dated, ATM Call option with over 250 DTE (ideally around a year out) and selling an ATM Call every Tuesday of expiration week. I close the long call when another sale would take it inside of 90 DTE.

          Surprisingly, the strategy holds up relatively well in a down market (for SPY and IWM). What I like about the LEAP over the stock is that you pay less up front and are still able to collect premium via short calls without being naked on the upside. The obvious difference is that you don’t receive dividends, but there is a bit more leverage because the cash outlay for a LEAP is less than for stock. Additionally, if you have a really bullish market the LEAP more than makes up for the losses on the short calls.

          Very interesting discussion.

          • The Lazy Trader

            Your idea is really, really, really interesting I most say. If the stock fails to move up your loss is defined, unlike holding the stock. We just have to make sure the credit collected over 52 weeks is superior as theta will be working against you on the leap. Although getting read of it at 90 DTE makes perfect sense as you avoid the fastest theta decay period. Really really interesting idea. I’ll see if I can do a study about it.

            LT

  • The Lazy Trader

    Thanks for this article Aram. I think we are living the good old days of the future. And here’s what I mean, with you writing about the markets, Dan from ThetaTrend, Bellini, myself all of us in an independent (not corporate related) and transparent fashion. Man, anyone would have thought this was a revolution only 5 years ago when I started writing and it looked like nobody shared their trades and a transparent track record like that (Perhaps because most traders fail). In the realm of investing, yes, there have always existed hundreds of sites about stock investing and dividends with people sharing their portfolios, but not in the trading world where everything was BS and it still mostly is.
    LT

    • Aram Basmadjian

      Thanks, LT. Your comments are well taken. I think what makes it even more beneficial for our readers is that each of our trading styles is a little (or a lot) different. Yes, we are all selling premium, but the strategies and methodologies utilized by each of us is quite different. Despite the differences in our trading styles, we are all making returns that make most mutual fund managers blush. Each of us has different personalities, time commitments and risk tolerances and we have developed a trading plan that works for each of us. I think that is really remarkable.

      • Guys thanks for including me in the list, it’s an honor to be in it. LT, I agree with you and I think the other thing that’s important to point out is that we all view this as a long run game where we’re trying to generate consistent, above average returns. There’s a strong emphasis on risk management and developing scalable strategies rather than a leverage party where blow up is inevitable.

        Aram, you’re also right to point out the range of styles. There are so many ways to approach the markets. It’s about finding what works for you and then becoming the best you can be at that.