Weekend Portfolio Analysis (April 9, 2016)

Major benchmark indices logged their worst weekly loss since February 5 amid global growth concerns. Two weeks ago, the stock market was propelled to its sixth gain in seven weeks by dovish remarks from Fed Chair Janet Yellen. However, this past week, equities were unable to build on their recent strength and the S&P 500 gave back most of the prior week’s gains. The stock market hit its lowest level of the week on Thursday as uncertainty over the global economy led investors towards safe havens.  The S&P 500 opened Monday at 2073.19 and closed on Friday at 2047.6, down 25.59 or 1.23%.

Chart_040816_SPX

The SPX is struggling to maintain the incredible rally that began on February 11th. Although the index is still above the 21-day EMA, the longer-term trend is a little more ominous with a series of lower highs marked by the horizontal yellow lines and the downtrending 200-day SMA.

Volatility edged off of its lows this week with the VIX peaking on Thursday at 16.77. The volatility index closed up 17% for the week at 15.36.

Chart_040816_VIX

Crude oil prices struggled on Monday, but rallied sharply for the remainder of the week on a surprise draw in the U.S. inventories. Tuesday afternoon, the American Petroleum Institute indicated that crude oil supplies had dropped by a massive 4.32 million barrels. On Wednesday, the Energy Information Administration (EIA) released its weekly petroleum status report confirming that crude oil inventories had in fact declined by 4.94 million barrels last week vs. an estimate of a 3.15 million barrel inventory increase. The stockpiles of crude oil have increased each week of the past seven weeks, so this is a significant change in trend. Baker Hughes also reported that drillers eliminated eight oil rigs over the past week, bringing the total rig count down to 354. The number of U.S. oil rigs currently operating compares with the 760 rigs that were in operation in the same week a year ago. /CL futures opened the week at $36.61 per barrel and closed Friday at $39.66 per barrel,up $3.05 or 8.3%.

Chart_040816_CL

Trade Activity This Week

TradeHistory_040816This week was not quite as active as last week. I closed five positions and opened three new positions.

On Monday morning I closed out the /GC Jun 1500/1025 strangle for $1.10. I had originally sold this strangle on March 16 for $2.30. After commissions, the profit was $105.76 (16.02% return on capital) in just 19 days. Later in the afternoon I was also able to close out the /GC Jun 1490/1055 strangle for $1.50. The strangle had been sold six days earlier for $2.10. Normally I would have held the position until I could capture at least 50% of the premium. However, with the contraction in volatility, I decided to close out the position early and wait for volatility to expand again to re-enter a position. The trade net a profit of $45.76 (5.69% return on capital) after commissions. With the closure of this trade, all of the /GC June expiration cycle positions have been exited.

On Wednesday, the decrease in crude oil volatility after the EIA announcement provided an opportunity to exit some positions. First, I closed the /CL Jul 60/25 strangle for $0.18. The trade was initially entered on March 15 by selling the strangle for $0.37. After commissions, the trade net a profit of $175.76 (26.63% return on capital) in 22 days. I also closed out the /CL Jun 58/27 strangle for $0.10. The trade was originally entered on March 24 for $0.20. This resulted in a quick profit of $85.76 (12.99% return on capital) in just 13 days.

Finally, on Friday with the huge rally in crude, I closed out the two /CL Jun 29 puts that remained from the original /CL Jun 57/29 strangle that I sold on March 17. Last week I had closed the 57 call side for a profit of $205.76. The puts were originally sold for $0.16 each and bought back on Friday for $0.10 each. This resulted in a profit on the put side of $105.76 in 22 days. The two strangles net a total profit (put and call side) of $311.52 (23.6% return on capital) in 22 days.

With the spike in volatility, I wanted to take a small position that would profit if volatility continued to expand. However, I was not willing to take the risk that would be associated with an outright purchase of a /VX futures contract. I decided to try something that I have never done before. On Thursday I sold a put credit spread on the iPath S&P 500 VIX Short-Term Futures ETN ($VXX). The trade details shown below.

upload_4_7_2016_at_10_24_41_AM_VXXVXX 15/14 Put Credit Spread
Trade Details:

SELL 5 VXX May 16 15 Put @ 0.39
BUY 5 VXX May 16 14 Put @ 0.16

Credit: 0.23 ($23.00 per contract/$115.00 total)
Max Risk: $385.00 (Breakeven Price: 14.77)
Margin Required: $385.00
Days to Expiration: 43
Probability of Profit: 75%
IV Percentile: 44.44%

Another position that I took on Thursday was also a bit unconventional – at least for me. With gold showing signs of strength, I sold a covered call in the SPDR S&P Metals and Mining ETF ($XME). Should XME show strength over the short term, my hope is that the stock will be called away generating a 5% return on capital.

upload_4_7_2016_at_12_38_41_PM_XME

upload_4_7_2016_at_12_41_54_PM_XME

XME May 20 Covered Call
Trade Details:

BUY 100 XME @ 20.00
SELL 1 XME May 16 20 Call @ 1.07

Credit: 1.07 ($107.00 per contract)
Max Risk: $1893.00 (Breakeven Price: 18.93)
Margin Required: $1000.00
Days to Expiration: 43
Probability of Profit: 60.43%
IV Percentile: 54.36%

This is definitely a lower probability trade than I normally would do. However, the potential return on capital is respectable without a great deal of risk.

Finally, on Friday as volatility expanded again in /GC, I decided to sell another high-probability strangle as outlined below.

upload_4_8_2016_at_10_20_29_AM_GC

upload_4_8_2016_at_10_23_07_AM_GC/GC Jul 1550/1035 Strangle
Trade Details:

SELL 1 /GC Jul 16 1550 Call @ 1.40
SELL 1 /GC Jul 16 1035 Put @ 1.10

Credit: 2.50 ($250.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1032.50 / 1552.50)
Margin Required: $676.00
Days to Expiration: 80
Probability of Profit: 97.45%
IV Percentile: 81.75%

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. The first week of April has started out strong with a 6% return. The portfolio is down 14.6% for the year versus up 0.46% for the S&P 500 (see Trading Results).   The portfolio is currently 68% in cash.

  • Very nice trading. Keep it up.

    • Aram Basmadjian

      Thanks, Jonathan!

  • palexis1

    Hi Aram, shouldn’t the breakeven price for the Put spread on VXX be $14.77 instead of $13.77?
    One suggestion on trade information – it would be very helpful if you could also add what price the underlying was at when you opened/closed the position, and the IV level. Keep up the good work!

    • Aram Basmadjian

      Yes! You are correct. Thanks for pointing this out. I have fixed the typo in the post. I will also start posting the price of the underlying when a position is opened/closed (if I can remember)! 🙂

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