Weekend Portfolio Analysis (November 14, 2015)

Market Conditions

The S&P 500 is once again in the red for the year. The markets declined for most of the week giving back a large chunk of the gains from the previous six weeks. This week’s decline was the largest in twelve weeks as the S&P 500 fell below its 200-day moving average. Helping drive the decline were a handful of weak earnings reports from retailers such as Macy’s (M), Norstrom, (JWN) and J.C. Penney (JCP). Additionally, U.S. sales at retail stores and restaurants rose bu only 0.1% in October from the prior month according to the Commerce Department’s Retail Sales Report. Economists had expected a 0.3% increase. The SPX opened Monday at 2,096.56 and closed Friday near the lows of the week at 2,023.04, down 73.52 or 3.51% for the week.


SPX did hold at the 61.8% fibonacci retracement on Friday. It will be interesting to see if this support holds next week, or if the market is going to continue lower.

Crude oil prices collapsed to their lowest levels since late August after the Energy Information Administration reported a huge increase of 4.2 million barrels in crude oil inventories for the week while analysts had been expecting supplies to be up by only 1.1 million barrels. Crude supplies have now increased for seven straight weeks. In a monthly report released Thursday, OPEC said that its production fell by 256,000 barrels a day in October to average 31.38 million barrels a day. That is still above the cartel’s output ceiling of 30 million barrels a day. WTI crude opened on Monday at $44.52 per barrel and closed Friday at $40.73, down 3.79 or 8.51%.


WTI crude oil futures for the December contract have now broken below a critical support level. Should it continue to decline and break below $40 per barrel, it will likely retest the August low of $37.75.

Gold also continued its four week losing streak by declining another xx% this week. Gold has struggled to gain traction since last Friday’s strong employment report significantly raised the prospect of an interest rate hike in December, placing pressure on the metal that doesn’t bear interest. Gold futures ended the week at $1,083.40 per ounce, it’s lowest finish since February 2010.


Trade Activity This Week

It was another fairly busy trading week as some new opportunities presented themselves.

On Monday with the move lower in the /ES, I was able to close out the /ES Nov 2160 call for a $74.68 profit (1.9% return on capital). Readers may recall that this option was part of a series of adjustments to the /ES Nov 1950 straddle. On Thursday with the continued move lower threatening the /ES Nov 2140 put, I decided to roll the put out to December as well as down to the 1975 strike. In doing so, I was able to taken in an additional $3.00 in premium ($150 credit received). Note that on the Trading Results page, I am showing the Nov 2140 put as completely closed out (with a loss of $392.82 including commissions) and have listed the Dec 1975 put as a new position. Although this trade was technically a roll, I think it is more accurate to list the closed option as a current loss which will hopefully be offset by the profit from the newly established position.

Also on Monday, I sold an iron condor in /ES. The trade details are listed below:

Trade Details:

BUY 1 /ES Mar 16 1675 Put @ 12.25
SELL 1 /ES Mar 16 1725 Put @ 15.75
SELL 1 /ES Mar 16 2250 Call @ 5.00
BUY 1 /ES Mar 16 2300 Call @ 1.75

Credit: 6.75 ($337.50 per contract)
Max Risk: $2,162.50 (Breakeven Prices: 1718.25 / 2256.75)
Margin Required: $151.00
Days to Expiration: 122
Probability of Profit: 84.37%

I plan to exit this trade at 50% of maximum profit. I have already entered a GTC order to buy back the iron condor for $3.25. Although this is a high probability trade, I have also established the point at which I will exit the trade using the Kelly formula as discussed earlier this week in the post, The Kelly Criterion – A Game Changer. Based on the formula, I will exit the trade when the loss exceeds 113% of the premium received (or when the condor is trading for $14.39). In full disclosure, I would like to thank my friend, Jonathan Lien, for inspiring me to make this trade. Jonathan is a very conservative credit-spread seller who manages the Create Monthly Income Fund. Below is the risk profile for this trade.


On Wednesday, with volatility increasing in crude oil, I placed another new trade. However, I will admit that I was a bit early to the party on this one.

Trade Details:

SELL 2 /CL Jan 16 28 Put @ .05

Credit: .05 ($50 per contract / $100 total received)
Max Risk: Unlimited (Breakeven Price: 27.95)
Margin Required: $774.00
Days to Expiration: 60
Probability of Profit: 97.38%

Since placing this trade on Wednesday, crude oil has continued to decline and volatility has expanded greatly increasing the premiums on these puts. Had I waited until Friday to place the trade, I could have received twice the premium that I did. Oh well… hind sight is 20/20! I have plenty of confidence that oil will remain well above $28 per barrel over the course of the next two months. I will close the trade at 50% of max profit. If the loss exceeds 234% of the credit received (or when the puts are trading at or above $0.17), I will plan on closing the position.

I have still been trying to reduce the cost basis on the YUM! Brands (YUM) stock that I was assigned last month. It seems that about as fast as I can reduce the cost basis, the stock continues to decline. On Thursday I purchased back the covered Nov 71 covered call for a $167.00 profit after commissions. As the stock continued declining Thursday, I decided to sell the Nov2 68.5 put with one day to expiration for $0.38. Of course, after the close on Thursday, sales data was released by YUM and the stock traded as high as 71.90 after hours. I was just about ready to concede that this stock was a dumpster fire and the entire position should be exited, but after this rally, I thought that maybe there was still hope for the stock after all. Friday morning after the stock opened, I exited my short call (for an $80 loss) and rolled out to December by selling the Dec 70 call for $1.90. This reduces my cost basis on the stock to $70.29. If the stock is called away at $70, I will have lost $29. Of course, the risk is that the stock will once again resume its decline.

Plan For Next Week

I will continue to watch and manage the /ES Dec 1975 put as well as the Dec 2025 straddle (which is, for the first time since opening this position, is showing a small profit). Once these two positions are closed out, I can get back to business “as usual”. I have started returning to my core strategies with the iron condor in /ES, the strangle in /GC and the puts in /CL this week. This offers a more diversified and non-correlated portfolio.

The portfolio is up 21.34% for the year versus down 1.74% for the S&P 500 (see Trading Results).   The portfolio is currently 15% in cash.

  • Thanks for the shout out! I also appreciate your transparency in reporting the position that you rolled as a lost in the current month. I have seen other services hiding these losses for months by constantly rolling and not reporting them as an actual lost. As you said, it is more accurate way of reporting. Good luck next week.