Weekend Portfolio Analysis (April 30, 2016)

Our webhosting service suffered a catastrophic failure of multiple drives on Thursday afternoon and service was only restored within the past hour. As a result, this site has been down since Thursday and email was also impacted. Everything seems to be back online now and no data appears to have been lost.

Market Conditions

Stocks suffered a downbeat week due largely to missed earnings estimates by Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Chevron (CVX), Gilead Sciences (GILD) and poor economic data. On Wednesday, the Federal Reserve left interest rates unchanged citing the slowdown in the economy along with a drop in household spending and exports. Thursday’s Gross Domestic Product numbers were weak with the first quarter GDP advancing only 0.5% (0.7% estimate), marking the slowest quarter since Q1 2014. But the major catalyst contributing to the market volatility was the surprise decision by the Bank of Japan against further stimulus. The S&P 500 opened Monday at 2089.37 and closed on Friday at 2065.3, down 24.07 or 1.15%.


The SPX broke and closed below the 8-day EMA on Thursday, but held the 21-day EMA. On Friday, the index opened below the 21-day EMA and broke below support at 2070. Intraday trading saw the SPX touch 2052, but towards the close on Friday, buyers came back in to prop up the market. There continues to be significant support at 2040.

Crude oil prices continued their relentless march higher this week. A weaker dollar and optimism that a global oil glut will ease have boosted crude futures about $20 a barrel since they hit 12-year lows below $30 in the first quarter of this year. On Tuesday, the American Petroleum Institute (API) reported an unexpected draw of 1.1 million barrels of crude oil for the latest week, which was significant in pushing up prices. On Wednesday, the latest Energy Information Administration (EIA) data reported another increase of crude oil stockpiles by two million barrels. This was higher than the expected build of 1.5 million barrels. Oil prices were then subjected to some profit taking after the release of the data. Although there are continuing fears surrounding an over-supply of crude, these fears have been countered by expectations of rising demand. Declines in production and a weaker dollar also have limited oil’s losses. Data from Baker Hughes this week showed that the number of active U.S. rigs drilling for crude fell by 11 to 332. There has been no sign of recovery in the oil-rig count despite climbing oil prices.

Crude oil opened the week at $43.75 per barrel and closed Friday at $45.99 per barrel, up $2.24 or 5.12%. Crude oil is up over 20% for the month of April.


Gold prices soared on Friday to their highest level in fifteen months, propelled by a weaker U.S. dollar and heightened demand for safe-haven assets. Friday’s move was the largest one-day gain since March 17th when gold rose 2.9%. The precious metal opened the week at 1234.50 and closed on Friday at 1294.90, up 60.40 or 4.89%.


Trade Activity This Week

TradeHistory_042916This week I closed four positions and opened four new positions. Clicking the thumbnail on the left will display the actual trade history for this past week.

As implied volatility continues to contract in crude oil options, it presented opportunities to exit most of my remaining /CL positions this week. While I was sleeping on Monday morning, I bought back the /CL Jul 57/28 strangle for .20 that I had originally sold on March 29th for .41. I was able to capture just over 50% of the maximum credit despite a rise in crude oil prices by 10% during the life of the trade. After commissions, the net profit was $195.76, or a 29.66% return on capital in 27 days.

Also on Monday morning, I closed the /CL Jul 58/27 strangle by purchasing back the position for .16. I had originally sold the strangle on March 28th for .33. The net profit on this trade was $155.76 after commissions (or 23.6% return on capital) in 28 days.

With volatility all but gone in crude oil, I have looked elsewhere for opportunities to deploy capital. Currently, the only product that interests me is gold. On Monday, the options with an August expiration were released in /GC. I took the opportunity to open my first /GC position in this cycle.


upload_4_25_2016_at_9_57_34_AM_GC_Analyze/GC Aug 1550/1025 Strangle
Trade Details:

SELL 2 /GC Aug 16 1550 Call @ 1.50
SELL 2 /GC Aug 16 1025 Put @ 1.20

Credit: 2.70 ($270.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1022.30 / 1552.70)
/GC Current Price: 1237.50
Margin Required: $1295.00
Days to Expiration: 92
Probability of Profit: 97.52%
IV Percentile: 65.48%

On Tuesday, I closed out both of the /GC Jul 1550/1035 strangles that I had sold on April 8 and April 12 for 1.20 each. The strangle opened on April 8th was sold for 2.50 when IV percentile was at 81.75%. Closing this trade resulted in a net profit of $115.76 (17.12% return on capital) in 18 days. The second strangle was opened on April 12th for 2.80 with IV percentile a bit higher at 85.71%. The profit on this trade was $145.76 (21.56% return on capital) in just 14 days. Between both contracts, the combined net profit was $261.52. Again, IV percentile had contracted to 67% which permitted a fairly rapid exit from these trades at 50% of maximum profit.

On Thursday, I decided to open the second position for August expiration in gold. With virtually all of my account in cash, gold offered the only place where some volatility still existed. The trade details are shown below.


upload_4_28_2016_at_7_48_33_AM_GC_Analyze/GC Aug 1575/1000 Strangle
Trade Details:

SELL 2 /GC Aug 16 1575 Call @ 1.70
SELL 2 /GC Aug 16 1000 Put @ 0.40

Credit: 2.10 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 997.90 / 1577.10)
/GC Current Price: 1262.20
Margin Required: $1283.00
Days to Expiration: 89
Probability of Profit: 99.93%
IV Percentile: 66.67%

Also on Thursday, I decided to exit the VXX May 15/14 credit put spread for a loss. Despite occasional increases in volatility, the inherent drag on VXX has worked against the position. Bad earnings, lower GDP, and yet the market still had not really rolled over. I decided to take the loss now rather than allowing it to continue growing larger. Of course, my timing was impeccable, as usual (tongue in cheek). After closing the position, volatility began to increase and I could have exited for a small profit had I waited just a bit longer. Oh well. Such is trading! I originally sold five contracts for .23 each and bought them all back for .52 each resulting in a loss of $175 after commissions. This is my first loss in a long time, so I shouldn’t complain.

Late on Thursday, as gold prices continued to rally, I decided to open yet another August position. Despite the rally on Thursday, the volatility remained fairly constant throughout the day. The trade details are shown below.


upload_4_28_2016_at_3_55_09_PM_GC_Analyze/GC Aug 1600/1075 Strangle
Trade Details:

SELL 1 /GC Aug 16 1600 Call @ 1.80
SELL 1 /GC Aug 16 1075 Put @ 1.20

Credit: 3.00 ($300.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1072 / 1603)
/GC Current Price: 1273.00
Margin Required: $779.00
Days to Expiration: 89
Probability of Profit: 97.85%
IV Percentile: 66.27%

Of course, hindsight is 20/20. I should have waited until late in the day on Friday to sell the gold strangles. Volatility in /GC options exploded on Friday afternoon. So, of course I sold another position. Trade details are below.


upload_4_29_2016_at_3_24_14_PM_GC_Analyze/GC Aug 1650/1050 Strangle
Trade Details:

SELL 1 /GC Aug 16 1650 Call @ 2.20
SELL 1 /GC Aug 16 1050 Put @ 0.90

Credit: 3.10 ($310.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1046.90 / 1653.10)
/GC Current Price: 1296.60
Margin Required: $613.00
Days to Expiration: 88
Probability of Profit: 98.26%
IV Percentile: 90.08%

Notice that the IV percentile increased from 66.27% when I placed the trade on Thursday to 90.09% when the trade on Friday was executed. Also note that for virtually the same premium, I was able to move my strikes quite a bit further away from the money.

Plan For Next Week

Of course with the huge spike in volatility late on Friday in gold, my /GC positions are pretty much all under water at this point. However, the probability of profit on these trades still remains very high at 96% or more for all of the open positions. As things settle down, and volatility contracts, these trades will become profitable. I have only one remaining crude oil position and it is currently right at breakeven. The short call is the 65 strike. Despite the climb in crude oil prices, I think this position is still safe.

The month of April is now in the rear view. It was another exceptional trading month with a gain of 13.97% for the month after commissions and fees. The portfolio is now down only 8.21% for the year versus up 1.33% for the S&P 500 (see Trading Results).   The portfolio is currently 40% in cash.