Weekend Portfolio Analysis (March 25, 2016)

Last week the S&P 500 rallied and, for the first time in 2016, closed up for the year on Thursday, March 17. One week later, the S&P 500 is back in negative territory for the year. The climb to positive territory was abruptly ended this week on Wednesday when five members of the US Federal Reserve’s rate-setting committee suggested that a rate hike could come as early as April. This ends the five week winning streak for the index. The SPX opened on Monday at 2047.88 and closed the abbreviated trading week on Thursday afternoon at 2035.94, down 11.94 or 0.58%.


Crude oil continues to keep traders on their toes. With the potential that OPEC countries will agree to production freezes at their April 17 meeting, crude oil prices have gradually climbed to new highs for 2016. However, oil prices have been under pressure since the Energy Information Administration (EIA) announced on Wednesday a 9.4 million barrel jump in crude supplies for the week ended March 18 when the concensus was about 3 million barrels. The number of active U.S. rigs drilling for crude fell by 15 to 372 as of Thursday, according to Baker Hughes. The report follows an increase of one rig the week before, which marked the first oil-rig count rise of the year. The rig count drop to historic lows helped stabilize the decline in crude. /CL futures opened the week at $41.07 per barrel and closed Thursday at $39.59 per barrel, down $1.48 or 3.6%.


Since crude oil bottomed on February 11th at $26.05 per barrel, it has trended upwards reaching a new high for 2016 this past Tuesday of $42.49 per barrel. The 60-minute chart below shows that /CL prices have remained within the channel during the entire recovery. What is interesting is that after breaking above the upper boundary and reaching the high on Tuesday, prices managed to traverse the entire width of the channel over the course of the following two trading days. Although prices did bounce off the lower boundary on Thursday, the question remains whether or not the upward trend can continue.


Looking at the same data a different way, it is interesting to see how the prices have respected the fibonacci levels.


Trade Activity This Week

This week I made six trades – three trades were closed and three new trades were placed.

On Wednesday, I bought back the /CL May 52/32 strangle for 0.11 that I sold on March 18 for 0.22. The profit after commissions was $95.76 which resulted in a return on capital of 10.64% in just five days. I also closed the /GC Jun 1500/1025 strangle for 1.40 that I had sold on March 16 for 2.90. This resulted in a profit of $135.76 (20.57% return on capital) after commissions. I have a second /GC Jun 1500/1025 strangle that I sold for 2.30. I have not closed this position yet, but have a GTC order in to close it at 1.10.

With some capital available and the increase in implied volatility in the crude oil options after Wednesday’s EIA announcement, I opened two new positions. The details of each of these trades is listed below. Clicking on the thumbnail images will enlarge them.


/CL Jun 56/30 Strangle
Trade Details:

SELL 1 /CL Jun 16 56 Call @ 0.12
SELL 1 /CL Jun 16 30 Put @ 0.17

Credit: 0.29 ($290.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 29.71 / 56.29)
Margin Required: $660.00
Days to Expiration: 55
Probability of Profit: 93.61%
IV Percentile: 44.44%


/CL Jul 63/24 Strangle
Trade Details:

SELL 1 /CL Jul 16 63 Call @ 0.09
SELL 1 /CL Jul 16 24 Put @ 0.11

Credit: 0.20 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 23.80 / 63.20)
Margin Required: $660.00
Days to Expiration: 85
Probability of Profit: 96.95%
IV Percentile: 53.17%

On Thursday, I closed the /CL Jun 60/22 strangle for .07 that I originally sold on March 7 for .17. The net profit after commissions was $85.76 resulting in a 12.99% return on capital. I added one more new position to the portfolio as outlined below.


/CL Jun 58/27 Strangle
Trade Details:

SELL 1 /CL Jun 16 58 Call @ 0.04
SELL 1 /CL Jun 16 27 Put @ 0.16

Credit: 0.20 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 26.80 / 58.20)
Margin Required: $660.00
Days to Expiration: 55
Probability of Profit: 96.76%
IV Percentile: 59.52%

Note that in each trade, the IV Percentile increased. As the implied volatility was rising, I layered on additional trades to take advantage of the increased premium. Crude oil has had exceptionally high volatility which has gradually started to decrease since its peak in mid-February. As that volatility increases again, I am taking advantage of the opportunity to add new trades for the June and July expiration.

Plan For Next Week

I will be looking for opportunities to close out profitable trades. I have quite a few GTC orders sitting that potentially could close early next week.

The portfolio is down 24.74% for the year versus down 0.11% for the S&P 500 (see Trading Results).  The good news is that every open trade in the portfolio is currently profitable with an unrealized profit of over $1100. The portfolio is currently 45% in cash.