Weekend Portfolio Analysis (June 18, 2016)

Market Analysis

Stocks fell in volatile trading as investor sentiment continued to weaken ahead of next week’s “Brexit” vote. A clear swing in opinion polls in favor of the Leave camp put markets on edge this week. Investors also focused on commentary from central banks around the globe, which wasn’t surprising, considering the Federal Reserve, Bank of Japan, Bank of England, and Swiss National Bank all held their policy meetings. All four stood pat, keeping their key interest rates unchanged. However, all four cited growth concerns that fueled a flight to safety and a somewhat surprising aversion to stocks. Surprising, only because up until now, dovish commentary from the Federal Reserve has elicited strong rallies in recent years. The S&P surrendered nearly 1% on the week, opening Monday at 2091.75 and closing on Friday at 2071.22, down 20.53 points.


Volatility has returned to the equity markets and is likely to remain until the fallout from Thursday’s upcoming “Brexit” vote is realized. The SPX closed each day this week (except Monday) below the 50-day moving average and the VIX is trading at its highest levels since February.

Trade Activity This Week

TradeHistory_061816The increase in volatility in equities has provided trading opportunities that have not existed for quite a while. I opened two new trades this week utilizing options on the S&P 500 futures contracts. Clicking the thumbnail on the left will display the actual trade history for this past week.

With the decline in the S&P 500 on Monday, and the increase in option premiums due to a significant volatility spike, I decided that it was time to re-enter a position in /ES. I have not traded /ES options since December of last year due to the lack of volatility. The trade details are shown below.


upload_6_13_2016_at_8_28_35_PM/ES Aug 1375 Put
Trade Details:

SELL 2 /ES Aug 16 1375 Put @ 2.00

Credit: 2.00 ($100.00 per contract)
Max Risk: Unlimited (Breakeven Price: 1374.00)
/ES Current Price: 2067.75
Margin Required: $510.00
Days to Expiration: 67
Probability of Profit: 97.81%
IV Percentile: 76.19%

Despite the move further down in the market throughout the week, this position is almost at my target profit level (50% of maximum profit).

On Friday, just before the cash close, I also sold a short-term straddle in /ES. I have traded /ES straddles before, although typically with 45 days or more until expiration. Although the market has quite a bit of volatility right now, I believe that it will continue to remain fairly rangebound until we hear the results of Britain’s vote to exit the European Union. With only 7 days to expiration, this straddle has a significant amount of daily theta decay and I am only looking to take a small portion of the potential profit out of this trade. Normally, with straddles, my profit target is 25% of the maximum profit. In this particular situation, I will be looking to exit with 10% of the maximum profit. The trade details are shown below.


upload_6_17_2016_at_3_54_30_PM/ES Jun 16 (Wk4) 2060 Straddle
Trade Details:

SELL 1 /ES Jun 16 (Wk4) 2060 Call @ 23.25
SELL 1 /ES Jun 16 (Wk4) 2060 Put @ 21.75

Credit: 45.00 ($2250.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 2015.00 / 2105.00)
/ES Current Price: 2061.50
Margin Required: $3836.00
Days to Expiration: 7
Probability of Profit: 51.8%
IV Percentile: 66.27%

The profit target on this trade is only $225.00. I will exit the trade by buying back the in-the-money option if the price of that option is equal to the credit received. I do not plan to hold this trade to expiration or even through the Brexit vote. I hope to exit on Monday or Tuesday at the latest.

Plan For Next Week

I am still looking for opportunities to exit my existing positions. I now am using as much capital as I am comfortable with. The grain markets have remained volatile. Although prices remain in the “sweet spot” of the strangles that I have on, increases in volatility have not allowed me to exit profitably yet.

The portfolio remains down at 0.12% for the year versus up 1.62% for the S&P 500 (see Trading Results).   The portfolio is currently 52% in cash.