Weekend Portfolio Analysis (June 11, 2016)

Stocks rallied during the first half of the week marking a new high for 2016. However, the rally was short-lived. The SPX came within 12 points of its historic all-time high on Wednesday, but was unable to continue the upward momentum. On Friday, the market gave in to selling pressure and the SPX closed down on the week.  Investor fear has returned due in part to the World Bank lowering its global GDP forecasts. This report, along with nervousness around the looming “Brexit” vote and the FOMC meeting next week put traders into a risk-off mode before going into the weekend. The S&P 500 opened Monday at 2100.83 and closed on Friday at 2096.07, down 4.76 or 0.23% for the week.

Chart_061016_SPX

Market Analysis

Volatility has finally returned to the equity markets with the IV Percentile on the SPX finally getting back above 50%. Even the VIX, which I had left for dead, spiked today and closed at its highest point since mid-March. The price action on Friday closed below the 8-day exponential moving average (EMA), but it did hold above the 21-day EMA. If we see a break below the 21-day on Monday, it could signal a change in the short-term trend. Between next week’s FOMC meeting and options expiration, there is the potential for a lot of two-way action.

Interestingly, the price of crude oil followed a similar pattern to the SPX this week, hitting year-to-date highs midweek, just to give most of these gains back later in the week. Crude oil prices broke below both the rising wedge pattern and the 8-day EMA on Friday. On Wednesday, the Energy Information Administration (EIA) reported that U.S. crude oil stocks fell for the third consecutive week by 3.2 million barrels versus analysts’ expectations for a 2.7 million-barrel drawdown. This along with the continued disruption of supply from Nigeria propelled oil higher. However, later in the week, crude gave up the gains with the report on Friday by Baker Hughes that the rig count had increased by 3 to 328 being the final nail in the coffin.

Crude oil opened the week at $48.88 per barrel and closed Friday exactly the same – at $48.88 per barrel.

Chart_061016_CL

Gold continued the rally that started at the end of last week. Not only did gold prices increase, but so did volatility – in a big way! With government-bond yields in Germany, Japan and the U.K. tumbling to record lows this week, gold has gained ground as a safe store of value amid economic uncertainty. Gold has also benefited from expectations for interest rates in the U.S. to stay low. The likelihood of the Federal Reserve raising interest rates in June has faded after a dismal jobs report supported concerns that the U.S. economy may not be strong enough to weather a rise in interest rates. Low interest rates tend to help gold, since the precious metal pays investors nothing and struggles to compete with yield-bearing assets such as Treasurys when borrowing costs rise. Gold opened Monday at 1245.5 and closed Friday at 1276.3, up 30.8 or 2.47%.

Chart_061016_GC

Trade Activity This Week

TradeHistory_061016This week I opened three new positions. Clicking the thumbnail on the left will display the actual trade history for this past week.

Due to the lack of volatility in so many of the products that I like to trade, I have been sitting on my hands for several weeks with very little trading activity. This week, volatility did perk up in corn (/ZC) and gold (/GC) offering some trade opportunities.

On Monday, I opened a second /ZC strangle for the September expiration cycle. With the increase in volatility, I was able to move the call option substantially further away from the money than the /ZC Sep 510/335 strangle that I entered on May 27th. The trade details are shown below.

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/ZC Sep 600/325 Strangle
Trade Details:

SELL 2 /ZC Sep 16 600 Call @ 1.625
SELL 2 /ZC Sep 16 325 Put @ 0.875

Credit: 2.50 ($125.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 322.50 / 602.50)
/ZC Current Price: 427.50
Margin Required: $336.00
Days to Expiration: 81
Probability of Profit: 93.07%
Implied Volatility: 35.12%

As is typical with commodities, the risk in corn prices is more to the upside than to the downside. Unlike equities which typically have put options that are priced higher than an equidistant call option, commodities have higher-priced calls than puts. This is due to the “floor” that exists with commodities. Corn, gold, crude oil, etc. will always have some inherent value because they are physical entities. Commodities will “crash”higher when a catastrophe occurs (crops ruined by floods, refinery fires, financial crisis, etc.). On Wednesday, as the crop reports were released, the volatility increased a bit more in corn, providing an opportunity to add another position.

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upload_6_8_2016_at_9_39_56_AM/ZC Sep 630/330 Strangle
Trade Details:

SELL 2 /ZC Sep 16 630 Call @ 1.875
SELL 1 /ZC Sep 16 330 Put @ 1.125
Credit: 3.00 ($150.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 327.00 / 633.00)
/ZC Current Price: 437.75
Margin Required: $347.00
Days to Expiration: 79
Probability of Profit: 93.28%
Implied Volatility: 36.74%

On Thursday and Friday, the volatility in gold futures options expanded due to both the looming FOMC meeting next week as well as the “Brexit” vote. Concerns about global economic slowdowns also triggered another flight to safety on Friday. With high volatility, I chose to open a /GC strangle.

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upload_6_10_2016_at_10_11_29_AM/GC Sep 1600/1075 Strangle
Trade Details:

SELL 2 /GC Sep 16 1600 Call @ 2.10
SELL 2 /GC Sep 16 1075 Put @ 0.70
Credit: 2.80 ($280.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1072.20 / 1602.80)
/GC Current Price: 1281.91
Margin Required: $1211.00
Days to Expiration: 76
Probability of Profit: 96.68%
IV Percentile: 89.68%

Plan For Next Week

Natural Gas (/NG) prices rocketed higher this week creating some anxiety with regards to my /NG iron condor. I am watching this position carefully and will look at exiting with a small loss if the trend continues. However, I believe that this rally will be relatively short-lived. With supplies at historically high levels and a strong seasonal tendency for weaker prices during the summer months, I think that we are close to the end of this rally.

The portfolio is down 0.12% for the year versus up 2.84% for the S&P 500 (see Trading Results).   The portfolio is currently 77% in cash.

  • John Vasko

    Hey Aram, I’ve really been enjoying your info since discovering the website a few weeks ago. I’ve ready a few of your recommended reads as well, which were great! Quick question for you, how are you calculating probability of profit for your trades? Are you using a formula or something embedded in your platform?

    • Aram Basmadjian

      Thanks, John! I am glad you are finding some useful information on the website. The probability of profit is calculated by the trading platform (thinkorswim). If you click on the Analyze graph thumbnail for any of the trades, you will see the probability of profit shown at the top of the graph in the center.

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