Weekend Portfolio Analysis (April 23, 2016)

Market Conditions

The S&P 500 closed above 2100 on Tuesday and Wednesday of this week – the first time since December 1, 2015. However, there was not enough momentum to push the index to an all-time high. Global equities were propelled higher this week by energy and commodity-sensitive companies.

Investors continued to receive first-quarter earnings this week and the results were mixed relative to lowered expectations. Disappointing results from Alphabet (GOOG) and Microsoft (MSFT) kept the Nasdaq behind the S&P 500 while economically-sensitive rail carriers like Union Pacific (UNP) and Norfolk Southern (NSC) exceeded market expectations.

The S&P 500 opened Monday at 2078.83 and closed on Friday at 2091.58, up 12.75 or 0.61%.


It appears that the bulls are still in charge of this market, despite the slight downturn on Thursday. The SPX has significant support at both 2070 and 2040 and is trading above the 8-day EMA.  The golden cross (50-day SMA crossing above the 200-day SMA) appeared in the Dow Jones Industrial Average earlier this week and appears to be imminent in the SPX chart as well.

Crude oil experienced volatility when trading opened Sunday evening as leaders from oil producing countries failed to strike a deal to freeze output and boost sagging prices at the summit in Doha. Iran has been strongly resistant to the idea of an output freeze as it attempts to recoup lost market share after being freed from the bondage of Western sanctions. With the country declining to participate, the meeting’s delegates appeared to doubt how effective a freeze could be. The meeting’s failure sent crude prices tumbling in early trading by more than six percent as traders resumed the commodity’s sell-off. However, by the end of trading on Monday, crude prices had bounced off of the 21-day EMA and closed above the 8-day EMA followed by a rally for the remainder of the week.

On Wednesday, the Energy Information Administration (EIA) reported a 2.1 million-barrel climb in crude-oil supplies for the week ended April 15. That was below the 3.1 million-barrel increase reported by the American Petroleum Institute late Tuesday, but above the climb of 1.6 million barrels expected by analysts. The U.S. oil-rig count fell by eight to 343 in the latest week, according to Baker Hughes, maintaining an extended trend of declines. The number of U.S. oil-drilling rigs, viewed as a proxy for activity in the sector, has fallen sharply since oil prices began declining last year, but not enough to relieve the global glut of crude. /CL futures for June delivery opened the week at $39.90 per barrel and closed Friday at $43.75 per barrel,up $3.85 or 9.65%. Crude is trading at its highest levels since bottoming in February and is up over 16% year-to-date. Notice the huge crush in volatility this week at the bottom of the chart.


Gold prices fell on Friday, giving back most of the week’s earlier gains, after European Central Bank President Mario Draghi indicated that there could be further interest rates cuts which propelled the U.S. dollar higher. A stronger dollar weighs on gold because the the metal, like crude oil, is denominated in dollars and becomes more expensive for holders of other currencies when the U.S. currency rises. Gold prices are up about 18% this year, coming off the biggest quarterly gain in 30 years in the first three months of the year as concerns about a U.S. recession and global growth have driven investors to safe havens.


But the interesting story this week was silver. Silver prices soared on Tuesday due to Chinese buying and reports that hedge funds have been upping their holdings in the commodity. The precious metal opened the week at 16.295 per ounce and closed on Friday at 16.985 per ounce, up 4.23%. It traded as high as 17.72 on Thursday, it’s highest price in nearly a year. Silver is now up 22.95% year-to-date, a huge jump after years of losses.


The metal’s rally has pushed the gold-silver ratio down closer to historical averages. The price of gold is now around 74 times that of silver’s, down from March, when it was around as much as 83 times that of silver. The last three times the ratio dropped below 80, silver outperformed gold by 60 to 302 percentage points in the next two or three years. In the metals market, silver is a bit unique: It’s a precious metal that also has some industrial uses.

Gold_Silver Ratio

Credit for the chart above goes to Bloomberg. I do not like to steal intellectual property from other sources, however I spent hours trying to create this chart on ThinkorSwim and was unsuccessful. If anyone knows how to create this chart in TOS, please contact me.

Trade Activity This Week

TradeHistory_042216This week I was able to close five positions and I opened four new positions. Clicking the thumbnail on the left will display the actual trade history for this past week.

On Sunday evening, I closed out the put side of the /CL Jun 56/30 strangle which was originally sold on March 23. With the collapse in discussions at Doha regarding a production freeze, and the gamma risk associated with the June expiration, I chose to close the put for a small loss. It was originally sold for .17 and I bought it back for .19 resulting in a small loss of $27.12 after commissions. Little did I know that volatility would collapse in a big way over the next few days. However, after the volatility crush started, I closed the call side of the strangle on Tuesday for .03. The call was originally sold for .12 resulting in a profit on this side of the trade of $82.88 after commissions. Overall, the entire trade net a profit of $55.76 after fees (8.45% return on capital) in 28 days.

On Monday, with volatility still fairly high in crude oil in the morning, I opened my second position for the August expiration cycle.


upload_4_18_2016_at_9_30_20_AM_CL_Analyze/CL Aug 65/22 Strangle
Trade Details:

SELL 2 /CL Aug 16 65 Call @ 0.10
SELL 2 /CL Aug 16 22 Put @ 0.08

Credit: 0.18 ($180.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 21.82 / 65.18)
/CL Current Price: 41.41
Margin Required: $1320.00
Days to Expiration: 88
Probability of Profit: 97.34%
IV Percentile: 78.17%

With about a 14% drop in volatility and the passage of time, I was able to close out both of the /GC Jul 1600/1000 straddles at 50% of maximum profit on Monday. I sold the original positions on March 29th and 30th for 2.00 and bought them back for 1.00. The total profit on the trade was $171.52 resulting in a 16.24% return on capital in just 21 days.

Also on Monday I closed out the /CL Jul 63/24 strangle. Volatility had not yet started to contract in crude oil. In fact, at the time that I closed the trade, volatility was right about the same level as when the trade was opened on March 23rd. The profitability was achieved simply due to theta decay over the previous 27 days permitting an exit at 50% of maximum profit. The strangle was originally sold for 2.00 and purchased back for 1.00. After commissions, the profit was $85.76 or 12.99% return on capital.

On Tuesday, volatility in crude oil had a massive contraction with implied volatility percentile beginning the day at about 72% and ending the day at 40%! Implied volatility in crude oil has not been this low since last November. As a result, I was able to close the /CL Jul 59/26 strangle at just over 50% of maximum profit. This trade was opened on March 29th by selling the strangle for 0.29 when IV percentile was at 67%. I bought back the position for 0.14 with IV percentile at 46%. The profit on the trade was $135.76 (20.57% return on capital) in just 22 days!

With volatility so anemic in crude, I looked elsewhere for opportunities to deploy capital that had been freed up. On Tuesday, I opened another strangle in /GC. IV percentile in gold has been one of the few places that has continued to be fairly inflated. The trade details are shown below.


upload_4_19_2016_at_9_34_31_AM_GC_Analyze/GC Jul 1525/1050 Strangle
Trade Details:

SELL 1 /GC Jul 16 1525 Call @ 1.70
SELL 1 /GC Jul 16 1050 Put @ 0.60

Credit: 2.30 ($230.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1047.70 / 1527.30)
/GC Current Price: 1258.50
Margin Required: $688.00
Days to Expiration: 69
Probability of Profit: 98.04%
IV Percentile: 73.81%

On Tuesday, the price of silver rallied hard taking volatility up with it. I wanted to take advantage of the huge increase in volatility, but was hard pressed to find a position that I was comfortable with. However, on Wednesday, I decided to sell a straddle. I typically will not sell straddles unless the IV percentile is well above 75%. In this case, IV percentile is at nearly 100%. The trade details are shown below.


upload_4_20_2016_at_3_54_22_PM_SLV_AnalyzeSLV Jun 16 Straddle
Trade Details:

SELL 1 SLV Jun 16 16 Call @ 0.80
SELL 1 SLV Jun 16 16 Put @ 0.63

Credit: 1.43 ($143.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 14.57 / 17.43)
SLV Current Price: 16.16
Margin Required: $466.00
Days to Expiration: 58
Probability of Profit: 50.76%
IV Percentile: 92.86%

On Thursday, with volatility expanding again in gold, albeit briefly, I put on another strangle in /GC as detailed below. The volatility contracted again shortly after placing the trade and it by the close on Thursday, the position was already at 25% of maximum profit.


upload_4_21_2016_at_9_14_03_AM_GC_Analyze/GC Jul 1500/1075 Strangle
Trade Details:

SELL 1 /GC Jul 16 1500 Call @ 2.40
SELL 1 /GC Jul 16 1075 Put @ 0.80

Credit: 3.20 ($320.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1071.80 / 1503.20)
/GC Current Price: 1272.60
Margin Required: $982.00
Days to Expiration: 67
Probability of Profit: 96.45%
IV Percentile: 78.97%

Although still a very high-probability trade, the call is a 5 delta call as opposed to the typical 2-3 delta call that I would sell. I was willing to take a bit more risk due to the inflated volatility, and, it looks as if this will pay off.

On Friday, as volatility in crude oil continued to collapse even further, I was able to close the first trade in the August expiration cycle, the /CL Aug 70/25 strangle, which was originally sold 7 days prior. The trade was opened on April 15th for a .21 credit. On that day, the IV percentile in crude oil was 74.6%. On Friday, the IV percentile had dropped to 38.89% and I was able to purchase back the strangle for a .10 debit. This resulted in a profit of $95.76 (14.51% return on capital) after commissions. Not bad for a one week trade!

Plan For Next Week

The Fed meeting will be the highlight of next week, but the fed funds futures market remains convinced that there is just a 1.0% chance of a rate hike being announced on Wednesday.

I still 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. As implied volatility has contracted significantly in the products that I like to trade, I may have more cash sitting on the sidelines than usual. The portfolio has generated a return on capital of 10.9% so far for the month of April. In the past two months I have recovered about 67% of the capital that was lost during the first two months of the year. This has been an incredible recovery from the significant drawdown that I experienced. The portfolio is now down 10.7% for the year versus up 2.62% for the S&P 500 (see Trading Results).   The portfolio is currently 60% in cash.