Thanksgiving Weekend Portfolio Analysis (November 28, 2015)

ThanksgivingThe abbreviated trading week was relatively quiet except for a brief increase in volatility early on Tuesday after news surfaced that a Russian fighter jet had been shot down by the Turkish military. However, stocks quickly recovered by the end of the day. The market has struggled to continue the rally that began on November 16th. There continues to be significant resistance between 2120 and 2135, a range that represents highs made earlier in 2015.  If the SPX is able to break above 2097, we may see another attempt to push above the that resistance zone before the end of the year. If unsuccessful, there appears to be reasonable support around 2020. The SPX opened Monday at 2,089.41 and closed Friday at 2,090.11, up just 0.70 or 0.03% for the week.


Crude oil attempted to rally early in the week in response to Saudi officials announcing their intent to stabilize the global energy market, but by the end of the week the rally had failed as the U.S. dollar strengthened with the Dollar Index (/DX) reaching its highest point in eight months. A strong dollar makes crude oil (which is priced in U.S. dollars) more expensive for holders of other currencies. That along with disappointing Chinese economic data this week put downward pressure on crude. Crude oil inventories rose again this week in line with expectations. Stockpiles increased by 961,000 barrels to 488.2 million barrels, marking the ninth-straight week of increases, according to the U.S. Energy Information Administration (EIA). Baker Hughes (BHI) reported on Friday that the weekly U.S. crude oil rig count fell by nine rigs from 564 to 555 in the week ending November 25th. In the past 13 weeks, approximately 18% of the crude oil rigs have been idled. The crude oil rig count is now at the lowest point since June 2010. WTI crude opened on Monday at $41.49 per barrel and closed Friday at $41.77, up 0.28 or 0.68%.


As noted in the chart above, crude oil has been range bound since late August remaining between $40 and $51 per barrel. This has made selling strangles quite profitable. Breakeven points for the strangles currently open in the portfolio are shown by the cyan (Feb ’16 contract) and magenta (Mar ’16 contract) lines.

Looking at the 20-year monthly chart below for crude oil offers some interesting clues as to what the future may offer. Note that when the RSI has signaled an oversold condition, the price of oil has rallied significantly. Also, crude is currently at a significant support level (78.6% retracement). Despite all of the rhetoric about $28 oil (which could occur, should the support not hold), the chart indicates the potential for higher prices, perhaps as a result of the geopolitical unrest in the Middle East.


Trade Activity This Week

I have continually been challenged as I have tried to recover losses from the YUM earnings strangle that went bad in early October. Several weeks ago as the stock started dropping further, I rolled down the covered calls. Now the stock appears to be on a road to recovery. On Monday, I chose to take a loss on the DEC 70 in-the-money covered call by buying it back for 4.25 ($238 loss) and selling the DEC 72.5 for 2.75. Although I have taken an interim loss by buying back the 70 Call, if the stock is called away this month (hopefully), I will have increased my profit on the trade.

On Friday, I bought back the /ES Mar 1825 put for 19.50. This was approximately 50% of the maximum profit potential. I originally sold the put on November 15th for 40.00. This resulted in a nice $1,019.68 profit (34.6% return on capital) after commissions. I then sold an /ES Mar 1700 put for 10.00 ($500 premium received). If we see a drop in the market in the next couple of weeks, I will look to add a second put to this position. These trades will be the final “adjustments” to the 1950 /ES straddle position.

Plan For Next Week

The portfolio now consists of trades that I feel very comfortable with. As trades reach their target profit levels, I will pull them off. Any increase in volatility will be an opportunity to place new positions.

The portfolio is up 22.1% for the year versus 1.52% for the S&P 500 (see Trading Results).  Despite the significant drawdowns in Novemeber, I am thrilled with the results so far this year. The portfolio is currently 37% in cash.

  • Bravo Aram. You are doing great. I like your strategy of closing the trade when it meets your target profit levels. I have been guilty of holding my positions a bit too long to try and squeeze more profits out of it.

    You should stick to strategies that resonates with you fits your risk profile. I know people who sell naked puts but that strategy would really make me nervous. I have always gravitated to selling spreads because it just makes sense to me. I will be looking to sell more spreads in SPX if we drop below 2035 next week.

    • Aram Basmadjian

      Thanks, Jonathan. There is nothing wrong with selling spreads. I agree, if we have another oversold condition, I am ready to take advantage of the opportunity, and will sell more puts or credit put spreads.