Weekend Portfolio Analysis (April 16, 2016)

Equities showed strength over the past week with the S&P 500 climbing to new highs for 2016. However, the weekly market performance continues to be choppy as indicated by five weeks in a row of alternating positive and negative performance.

The past week kicked off the start of earnings season for the first quarter. While only about five percent of S&P 500 corporations have reported, early results have been solid. Of the 24 companies that reported so far, 79% reported earnings that exceeded expectations versus 21% reporting earnings that fell below expectations. The S&P 500 opened Monday at 2050.23 and closed on Friday at 2080.73, up 30.50 or 1.49%.


Last week it appeared that the SPX might break down. However, the bulls took over with vengeance and the SPX broke out above resistance at 2070 on Wednesday. The VIX also declined this week and continues trading in the range between 13 and 16. With the VIX continuing to trade sideways, and the SPX above all of the moving averages, the potential exists for the market to make another run towards all-time highs.

Crude oil prices hit a milestone on Tuesday rallying above the 200-day moving average for the first time since July 30, 2014. However, the rally that began the previous week after the favorable inventory report was not sustainable. The Energy Information Administration reported on Wednesday that U.S. crude inventories increased by 6.6 million barrels, bringing the total in storage to 536.5 million barrels in the previous week. The consensus had been that inventories would only increase by 1.6 million barrels. Oil prices faltered for the rest of the week closing back below the 200-day SMA on Friday. The weekly rig count from Baker Hughes indicated that the number of U.S. oil rigs declined to 351 for the week ended April 15, from 354 the week prior. /CL futures for June delivery opened the week at $39.72 per barrel and closed Friday at $40.40 per barrel,up $0.68 or 1.7%.


Trade Activity This Week

TradeHistory_041616It was a relatively quiet trading week. Two positions were closed and three new trades were added. Clicking the thumbnail on the left will display the actual trade history for this past week.

On Sunday evening, shortly after the futures market opened, I was able to close the two /CL Jun 28 puts by purchasing them back for $0.06 each. These puts were originally part of the two /CL JUN 61/28 Strangles that I sold on March 18th. The puts were originally sold for $0.10 and $0.13. Closing the put side of the strangle resulted in an additional profit of $95.76 after commissions. With the puts and calls both closed, the total profit from both strangles was $221.52 which was a 16.78% return on capital in 23 days.

After the big rally in gold on Monday, the XME May 20 Covered Call position that I placed last week was nearly at 50% of maximum profit, so I chose to close the position. I purchased the stock last week for $20/share and sold it for $21.42/share. I took a loss on buying back the in-the-money call, but the profit on the stock more than made up for that loss. The call was originally sold for $1.07 and I purchased it back for $1.96. Overall, the position net a profit after commissions of $40, a 6.67% return on capital in just 5 days.

Volatility in gold (/GC) expanded on Tuesday, so I decided to scale my /GC position by selling a second /GC Jul 1550/1035 strangle. The trade details are shown below.


upload_4_12_2016_at_9_12_22_AM_GC_Analyze/GC Jul 1550/1035 Strangle
Trade Details:

SELL 1 /GC Jul 16 1550 Call @ 2.10
SELL 1 /GC Jul 16 1035 Put @ 0.70

Credit: 2.80 ($280.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1032.20 / 1552.80)
/GC Current Price: 1262.90
Margin Required: $680.00
Days to Expiration: 76
Probability of Profit: 97.83%
IV Percentile: 85.71%

On Tuesday, I also did a trade that is a bit unusual for me. I bought a lottery ticket. With concern that the market might be getting tired, I bought a very inexpensive /ES put. In hindsight, I put the trade on too soon, but the risk was minimal.


upload_4_12_2016_at_10_24_05_AM_ES_Analyze/ES May 1780 Put
Trade Details:

BUY 1 /ES May 16 1780 Put @ 2.95

Debit: 2.95 ($147.50 per contract)
Max Risk: $147.50
Days to Expiration: 38

This trade is essentially an insurance policy in case the market decides to roll over in the next few weeks.

The final trade of the week was placed on Friday as /CL volatility increased going into the weekend due to the OPEC meeting in Doha. All eyes are on Doha as producers, led by top exporters Saudi Arabia and Russia, meet on Sunday to discuss freezing output around current levels in an effort to contain a glut exacerbated by production that exceeds demand by about 1.5 million barrels a day. The EIA stated earlier this week that they believe this meeting will have no impact on the global glut of crude oil.


upload_4_15_2016_at_10_49_05_AM_CL_Analyze/CL Aug 70/25 Strangle
Trade Details:

SELL 1 /CL Aug 16 70 Call @ 0.08
SELL 1 /CL Aug 16 25 Put @ 0.13

Credit: 0.21 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 24.79 / 70.21)
/CL Current Price: 42.62
Margin Required: $660.00
Days to Expiration: 91
Probability of Profit: 97.14%
IV Percentile: 74.6%

This is a another high-probability trade in /CL and marks the first trade in the August expiration cycle (which ends July 16).

It is interesting to note that despite the 80-90 days remaining until expiration, these trades have been reaching 50% of maximum profit in approximately 14-21 from placing of the trade. The longer duration allows the strikes to be placed very far out-of-the-money.

Plan For Next Week

I have several trades that are very close to 50% of maximum profit. As soon as they reach the target profit level, I will close them and look for opportunities to re-deploy the capital elsewhere. The portfolio has generated a return on capital of 7% so far for the month of April, but is still down 13.8% for the year versus up 2.09% for the S&P 500 (see Trading Results).   The portfolio is currently 58% in cash.

  • Aaron Charles

    excellent job Aram , keep up the good work.

  • Rebeka Justin

    nice Article you have Shared here . Actaully I am late Reach in your Site , i am also a technical Analyst at Equity Profit (www.equityprofti.com) . as per my analysis market It was a sureness that the business sector would keep going up, particularly amid FOMC week, would it say it wasn’t? Ok, the business sector and its entertaining ways. It wound up down more than 1% for the week, not the apocalypse, but rather it practically feels like it after so long. Year to date, the S&P500 is presently up 1.05%

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