Weekend Portfolio Analysis (April 2, 2016)

Major indexes were higher on the week led by the technology sector. Most of the gains occurred mid-week after Federal Reserve Chair, Janet Yellen, commented that the Fed will raise rates at a slow pace. On Friday, the Non-Farm Payrolls report indicated that the economy added 215,000 jobs in March, in line with expectations for a gain of 205,000, according to Bloomberg. The unemployment rate rose slightly to 5.0% from 4.9% as more workers returned to the workforce. The S&P 500 opened Monday at 2037.89 and closed on Friday at 2072.78, up 34.89 or 1.71%. Friday’s close marks the highest close for the S&P 500 in 2016.


The SPX has had an explosive rally off of the February lows with only small corrections along the way. How long the market can continue the upward trajectory is anyone’s guess. We are only 62 points away from the highs set last summer and currently probabilities indicate that could be achieved within the next 30 days.

The volatility indices were all sharply lower on Friday. The VIX closed the week at 13.1, its lowest close since August 17, 2015 – the day before the SPX began its 6-day 11% correction.


Crude oil prices collapsed this week ending the six-week winning streak. Prices have declined for the past eight sessions. Friday’s decline was the largest in over a month on signs that OPEC may fail to complete a deal to cap their output. Earlier in the week, the Energy Information Administration (EIA) released its weekly petroleum status report indicating that crude oil inventories had increased by 2.3 million barrels last week. The crude oil inventory stands at historically high levels for this time of year, according to the EIA. The weekly count of working oil rigs from Baker Hughes on Friday showed that numbers fell by 10 operating rigs to 362 last week. That is just more than a fifth of its high from less than two years ago. /CL futures opened the week at $39.55 per barrel and closed Friday at $36.63 per barrel, down $2.92 or 7.4%.


Despite upbeat U.S. and China data that pointed to the likelihood of stronger demand for oil and the drop in rig count for the week, crude oil has now clearly broken below the upward trending channel in the 60-minute chart below.


Trade Activity This Week

TradeHistory_040216This week I placed 14 trades. In the interest of transparency, starting with this week I will be posting the actual Trade History from my trading platform which will make it easier for readers to see exactly what trades have been placed. Clicking on the thumbnail to the left, will allow the Trade History to be clearly viewed.

On Monday I closed out two crude oil strangles. First, I closed the /CL May 47/30 strangle for $0.12. I originally sold this position on March 15 for $0.30. This resulted in a profit after commissions of $165.76 (15.91% return on capital). I then bought back the /CL May 53/29 strangle for $0.05. I originally opened this position on March 18 for $0.11. The profit on this trade was $45.76 (6.93% return on capital) after commissions. I also opened a new /CL strangle for the July expiration cycle as outlined below. Clicking on the images will enlarge them.


/CL Jul 58/27 Strangle
Trade Details:

SELL 1 /CL Jul 16 58 Call @ 0.15
SELL 1 /CL Jul 16 27 Put @ 0.18

Credit: 0.33 ($330.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 26.67 / 58.33)
Margin Required: $660.00
Days to Expiration: 80
Probability of Profit: 93.18%
IV Percentile: 57.94%

On Tuesday, I closed out the /CL May 47/30 strangle. This position was the last of the May expiration cycle that was still open. The strangle was originally sold on March 15 for $0.30 and I was able to buy it back for $0.10. The profit after commissions was $185.76 (17.83% return on capital). I then opened two new /CL positions as detailed below.


/CL Jul 59/26 Strangle
Trade Details:

SELL 1 /CL Jul 16 59 Call @ 0.09
SELL 1 /CL Jul 16 26 Put @ 0.20

Credit: 0.29 ($290.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 25.71 / 59.29)
Margin Required: $660.00
Days to Expiration: 79
Probability of Profit: 94.32%
IV Percentile: 67.06%


/CL Jul 57/28 Strangle
Trade Details:

SELL 1 /CL Jul 16 57 Call @ 0.13
SELL 1 /CL Jul 16 28 Put @ 0.28

Credit: 0.41 ($410.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 27.59 / 57.41)
Margin Required: $660.00
Days to Expiration: 79
Probability of Profit: 91.15%
IV Percentile: 64.68%

With the implied volatility increasing again in gold, I took the opportunity to open two new strangles as outlined below. The first trade is for the June expiration cycle and the second trade is for July expiration.


/GC Jun 1490/1055 Strangle
Trade Details:

SELL 1 /GC Jun 16 1490 Call @ 1.30
SELL 1 /GC Jun 16 1055 Put @ 0.80

Credit: 2.10 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1052.90 / 1492.10)
Margin Required: $804.00
Days to Expiration: 57
Probability of Profit: 98.31%
IV Percentile: 75.40%


/GC Jul 1600/1000 Strangle
Trade Details:

SELL 1 /GC Jul 16 1600 Call @ 1.10
SELL 1 /GC Jul 16 1000 Put @ 0.90

Credit: 2.00 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 998.00 / 1602.00)
Margin Required: $477.00
Days to Expiration: 90
Probability of Profit: 98.66%
IV Percentile: 75.40%

On Wednesday I bought back the /CL Jun 51/31 strangle that I had original sold on March 8 for $0.97. I was able to buy it back for $0.43 which resulted in a very nice $525.76 profit (48.23% return on capital) after commissions. I also sold a second contract of the /GC Jul 1600/1000 strangle that I had opened the day before. This contract was also sold for $2.00.

On Friday, with the strong move down in oil, I found that several of my June /CL calls were almost worthless. Normally, I prefer to close strangles as a “package” (both the call and put at the same time). However, with very little value left in the calls, I decided to close the call side. Should oil rebound again, I can always reopen the call side to collect additional premium. I have two /CL Jun 61/28 strangles. I bought back both the calls for $0.01 and $0.02. This resulted in a profit on the first 61 call (originally sold for $0.10) of $82.88 (25.12% return on capital). The second 61 call (originally sold for $0.07) generated a profit of $42.88 (12.99% return on capital). I also bought back both Jun 57 calls for $0.02. These were originally sold as part of the Jun 57/29 strangle on March 17th for $0.13. This resulted in a profit of $205.76 (31.18% return on capital) after commissions.

Finally, to facilitate the acquisition of additional shares in my previous employer, SkyWest Airlines, I sold two SKYW Jul 12.5 puts for $0.20 each. This is simply a way to reduce cost basis should the stock drop back to these levels.

Plan For Next Week

I will continue to look for opportunities to close out profitable trades. Most of the remaining trades will likely require 14-18 days before they can be closed profitably.

March 2016 is now in the rearview mirror and marks my best trading month since starting this blog 16 months ago with a one month gain of 19.28% after commissions. The portfolio is down 17.57% for the year versus up 1.7% for the S&P 500 (see Trading Results).  April is off to a good start and I am hopeful that I can recover the remainder of my losses from the first two months of the year over the next couple of months. The portfolio is currently 42% in cash.